What is a bank reconciliation statement?

If the balance in your cash accounts on the book differs from your bank’s records, something might be amiss. It could be because of an accounting error, fraud, another issue or simply a check outstanding or deposit in transit. Fortunately, there’s a process you can use to check for inconsistencies in your business transaction records: bank reconciliation.

Why all businesses should reconcile their bank accounts

With bank reconciliation, you can ensure your financial records are accurate, and there are zero unexplained inconsistencies in your day-to-day transactions. This guide will help you understand everything you need to know about what a bank reconciliation is and how to prepare one.

The main reason your company should reconcile its bank statements is because you need to ensure your cash balance on the balance sheet is accurate.

Even if you’re running a small business, you should still use a bank reconciliation. Besides enabling you to report the most up-to-date figures, reconciling a bank statement reveals discrepancies between your business operations and the bank’s reporting.

Knowing this information enables you to discover potentially nefarious activities, the bank administrator’s incompetence, or weaknesses in your reporting system.

Think of a bank reconciliation as a way to compare your reporting to practical events that have unfolded. The two have to match, so a bank recon is a double check to ensure that what’s on paper has manifested in reality. If that’s not the case, you have to make adjustments to ensure alignment.

The ins and outs of a bank reconciliation

The account holder is responsible for preparing a bank reconciliation to identify differences between the cash balance and the bank statements.

What it is: A bank reconciliation consists of a business’s deposits, withdrawals, expenses, and other activities directly impacting your bank account during a particular period.

The statement is a summary of business activity and used for reconciling your company’s bank account to cash balances. Its purpose is to ensure that the payments you processed and the cash you deposited are part of the bank account balance.

Why is it important? Bank administrators process bank service fees, interest, and other bank transactions that you might not be aware of or not know the exact amounts of. A bank statement shows you those transactions and enables you to capture them in your records to reflect all the transactions affecting your business.

But more importantly, a bank reconciliation helps you discover errors between accounting records and your bank balance.

Reconciling your bank statement provides several benefits you can take advantage of:

Advantages

  • It detects fraud: This can happen when the person you paid with a check attempts to modify amounts, resulting in a larger payment than intended.Once you notice a check processed for an incorrect amount, you can intervene by contacting the bank and informing them of nefarious activities. Besides modified checks, bank statements also show you invalid bank transactions.
  • Identifies errors: Your company taxes are determined based on profitability and certain transactions. Your financial records need to be accurate to calculate the right amount for tax payments or refunds.Bank reconciliations help you identify errors in reporting for a specific period, enabling you to adjust records to reflect the right balances. Correct figures pave the way for the right tax calculation and help management make the most informed decisions.By not doing a bank recon, you risk paying too much tax or forfeiting a portion of a tax refund.
  • Allows you to spot checks that haven’t been paid: Whether you’re wiring money or writing out a check, transfers incur delays. You may have recorded a payment in your financial records, but it might not reflect in the bank statement because of transfer delays.
  • Achieves an accurate balance: Your cash balance and bank statements need to reflect the same amount. If that isn’t the case, a bank reconciliation statement shows you the discrepancies so you can make adjustments to match balances. Keep in mind that if you have a deposit in transit or checks outstanding, balances may not match for a time—and that’s to be expected.
  • Voided checks can clear: You need to void a check that hasn’t cleared after a long period to issue a replacement. The bank should reject the original check if the payee cashes it, but failing to void it means that an adjustment has to be made in your bank transactions. Additionally, failing to void an uncashed check may result in making a double payment to the payee.
  • Changes in dates: It’s possible that a bank administrator processes a transaction on a different date than your records. That can create confusion for reconciling, especially if you’ve made several payments for the same amount to a particular supplier.

How to do a bank reconciliation

Doing a bank reconciliation is fairly simple, but you need to be diligent in your efforts and avoid skipping steps to ensure the right checks and balances.

Step 1: Collect the business and bank records

Prepare your financial records for a particular period by processing receivables and payables. Then, request a statement from the bank for that particular period.

After you’ve received bank statements, establish the last reconciled transaction from the previous period and begin there.

Step 2: Compare the deposits and withdrawals

You need to make sure that all the deposits you’ve recorded in the books reflect in the bank statement. Match each deposit from the debit side of your record to the credit side on the bank statements while ensuring that the amounts correspond. Mark corresponding transactions.

Do the same with withdrawals. After you have compared the deposits and withdrawals, determine any missing transactions.

It’s possible there are additional transactions on the bank statement that you may not have in your records. Find out the reason for the additional or missing bank transactions before making adjustments.

Step 3: Adjust the bank statements

Your books may not reflect the same balance as the bank statements. The reason could be that deposits are in transit or outstanding checks have not yet been reflected.

For the deposits in transit, you need to add them to the bank statements. Here’s why: a debtor has given you a check that you’ve recorded, but the bank hasn’t reflected it in the statement because of delays. When you add it, your bank balance and cash balance will match.

As for outstanding checks, you’ve recorded them in the books, but they haven’t cleared in the bank account. You need to deduct the check amounts from your bank balance to decrease it so that it reflects the balance of your cash book.

Also, if you’ve made a check payment at the end of the month, it might not clear until the following reporting period.

One more thing to keep in mind when working on this step of the reconciliation process: sometimes the bank makes mistakes by omitting transactions or reflecting an incorrect amount.

Step 4: Make adjustments to the books

Your books may not match the bank statements because the bank has added expenses. If the bank has added legitimate entries, you need to make adjustments in your books so the two reflect the same transactions.

Expenses such as overdraft fees or monthly bank fees need to be deducted from your cash balance. If the bank has processed interest earned, it should reflect as an addition in your records.

You’ll also need to make an adjustment if you notice that a not-sufficient-funds (NFS) check hasn’t cleared.

In this case, the bank hasn’t honored it due to insufficient funds from an entity’s account. That means it hasn’t been reflected in the bank statements, yet it’s recorded in your cash book, so you need to deduct it from your records.

If you detect incorrect amounts or an omission in your books, you also need to correct those transactions so your records match the bank statements.

Step 5: Compare the balances

Check the balances of the bank statements and the cash balance in your books after you’ve adjusted all the transactions and compared them. The two balances should be the same. If not, there may be checks outstanding or deposits in transit or you may need to perform another reconciliation.

Need additional support? Download this free bank reconciliation template.

A bank reconciliation in action

Company XYZ has an opening balance of $100,000 in its book and bank statements for the beginning of September 2021.

During September, the company received $120,000 from sales and invoiced debtors $40,000 the previous month, and received a check that has not yet been reflected in the bank account.

The company also paid $80,000 and monthly salaries of $30,000.

XYZ’s books

chart of opening balance

XYZ’s bank statements

chart of bank statements

The difference between the books and the bank statements is $40,000. The company reflected the payment it received from debtors in its cashbook, but the payment hasn’t yet reflected in the bank account. The two balances will be the same once the check reflects.

The formula for bank reconciliation calculation

Every business has different transactions and errors, so it’s helpful to think of the formula as a tool to guide you through the bank reconciliation process.

The formula for bank reconciliation is:

(Cash account balance) plus or minus (reconciling particulars) = (bank statement balance)

To understand how to use this formula, let’s look at an example using transactions that are common in most companies:

Company PQR had the following transactions for December 2021:

  • Interest income of $300 was not recorded in the book
  • Monthly bank charges $20
  • Overdraft fees $30
company pqr

So, to reconcile the amounts, you simply add the additions (interest income) and subtract the subtractions (bank charges and overdraft fees) to reach the bank balance. Ideally, the balance in your books is the same as the closing bank balance.

When the amounts aren’t equal, you’ll need to verify the numbers, fix any errors, and repeat the reconciliation process to find out where the discrepancy is.

Recording bank reconciliations

After identifying the reasons your bank statement doesn’t match accounting records, you have to update your records. If the bank has made errors, notify them so that they correct the transactions.

If transactions on the bank statements are correct, you need to adjust your books. The way to do that is through journal entries. That will ensure your books and bank statement balance match.

Common bank reconciliation problems

Companies face several challenges when reconciling bank statements to financial activities, so it’s important to highlight common problems you may encounter.

Oversights

Due to the overwhelming paperwork that the financial department deals with, it’s possible that some invoices get misplaced or are never recorded.

An expense or a sale may have been overlooked and not added to the ledger, causing a balance difference between the book and the bank statement.

Missed reconciliations

Companies should do reconciliations regularly. Doing them monthly after receiving the bank statements helps the financial department to close off the month and carry over the balance to the next one.

Plan to complete reconciliations monthly so you don’t risk accumulating a large number of discrepancies, which could be difficult to track. If done regularly, a bank reconciliation easily helps you identify discrepancies so that you can adjust them.

Duplicate payments

It’s not uncommon for companies to pay a supplier twice for the same invoice, especially when it’s a recurring amount.

Matching the payment to an invoice can be challenging if the payments are ongoing, so it’s important to reference payments to an invoice number so you can easily identify a double payment.

Timing

Transaction delays cause balances between books and bank accounts to mismatch, for example, if you paid a creditor via bank transfer at month-end and recorded the payment in your cash book, but the payment takes a few business days to reflect in the bank statement.

Or if a debtor has paid you via check and you’ve credited the account, but the receivable isn’t reflected yet in the bank statement.

A bank recon helps you manage your cash flow, enabling you time your income to ensure you have sufficient funds for expenses.

Simplify bank reconciliations with automated expense tracking

Doing bank reconciliations regularly helps companies control their financial transactions and easily track errors and omissions. A bank reconciliation statement should be completed monthly but can even be done weekly if your company processes a large number of transactions.

Instead of doing a bank reconciliation manually and risking oversight, you need expense management software to ensure efficiency and accuracy.

Modern accounting software simplifies invoice processing to help you expedite the month-end procedure and provides a management system to track expenses in one place. Divvy’s expense management software offers automatic receipt matching, automated expense reports, and more. Find out how Divvy makes tracking your business transactions easier.

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