What Does a Bank Reconciliation Do?

One vital accounting process when running a business is bank reconciliation. It is often an overlooked process; some might say it is no longer necessary. However, tracking transactions and matching your company’s ledger and bank statements is essential.

A small mistake can slip by you. If you don’t find it, it might cost a lot for your business. This includes the time it takes to resolve the issue to the penalty fees that could follow.

Bank reconciliation helps ensure you can find these mistakes and correct them before they become a bigger problem. This article covers what a bank reconciliation is and provides a step-by-step guide on how to do it.

What Is a Bank Reconciliation?

Bank reconciliation refers to comparing the balance sheet of a company’s cash account to the data on its bank statements. A bank reconciliation ensures that both entries reflect the same information. It allows you to find the differences and determine the necessary changes.

Scheduling a regular bank reconciliation confirms that the company’s records are correct. It also helps to prevent fraud.

If bank reconciliations aren’t done at regular intervals for all accounts, you may have to deal with bounced checks. You may find fees you have yet to settle because of insufficient funds in your cash accounts. You get your bank statements at the end of each month.

It should show the starting balance, transactions made during the month, and the ending balance. Make sure to go through a bank reconciliation at least every month when the bank statement comes in.

Why Do You Need a Bank Reconciliation?

Even if you made only a few transactions in a month, it’s still crucial to reconcile all active accounts. Doing this at least once a month provides an accurate representation of your company’s available funds. If you fail to do so, transactions that have not yet fallen through could result in overdraft fees.

Additionally, you’ll be able to spot any accounting errors made by your company and catch them in time. You might also find unusual transactions not made by the company. This should help you stop any fraud from draining your funds.

Bank Reconciliation Differences

When you first compare the bank’s statements to your company’s records, it’s unlikely that ending balances will be the same. This is because you have to consider factors that could change the final balance.

This includes things such as fees that the bank has charged for certain services. There could also be interest income, as some banks provide accounts with interest.

A difference could also occur if there are deposits still in transit. This may include checks or cash that the company has recorded but were not yet recorded by the bank. The same goes for outstanding checks that the company has provided, but the payment hasn’t yet gone through.

Another example of bank reconciliation difference comes from not-sufficient funds checks or NSF. An NSF check is a check that the bank of the company does not consider because of insufficient funds in the company’s account. The bank will subtract the check if this happens.

To avoid confusion, many companies invest in software programs designed for bank reconciliation. This makes it easier for companies to adjust data according to their accounts.

You can also find bank reconciliation templates to reduce the amount of work needed. Outline anything you might need to come to your attention.

Bank Reconciliation Procedure

First, you need to prepare your reconciliation form and input basic data. Include dates as well as the ending balance of the bank statements and the company’s records. You will need to pay great attention to detail and ensure that all the starting information matches.

Next, compare the bank account deposits with the ones listed on your company’s record. If you make multiple deposits, double-check to see that all transactions are equal.

Identify which checks are still uncleared and if any of your deposits are still processing. Add back any transactions still processing and deduct outstanding checks.

For example, if you’ve written a check to a supplier and have deducted that check from your company’s general ledger but the bank has yet to process it, subtract the value of the check from the bank’s statement. You should also include outstanding checks from previous months.

Check to see if an outstanding check from the month prior has cleared yet. If not, deduct it from the bank statements as well.

It’s important to remember that banks make mistakes too. If you’ve listed a deposit as soon as it was made and the bank, for example, leaves a zero off, your account could be overdrawn. You might have to pay penalty fees if you don’t report it.

The following adjustments you need to make are to your company’s general ledger. First, you will need to adjust the above-mentioned differences.

Deduct bank service fees, NSF checks, penalties, and overdraft fees, then add interest income. After making all the necessary changes, the new bank balance should be equal to your company’s general ledgers.

Bank Reconciliation Statement

Once you’ve completed the bank reconciliation process, you can then print a report using the software program that you used. The bank reconciliation statement should show your company’s records and the bank statements.

It should also list inconsistencies and any remaining unresolved differences, if any. Make sure to keep a copy of these statements each month to provide to your auditors at the end of the year.

Bank Reconciliations Are Essential

Working with a company entails plenty of responsibility. It is easy to lose track of the different accounting processes that you’ll need to go through. Completing a bank reconciliation for each active account should not get overlooked.

Bank account reconciliation not only helps you balance bank statements and the expenses of your company. It also identifies any mistakes made, spots any outstanding checks, and helps you keep track of every deposit made.