What are the Five Steps of Bank Reconciliation?

File for accounting with calculator and pen. Image credit to Jacqueline Macou.

If you want to ensure that all of your business' assets have been properly accounted for, you'll need to conduct bank reconciliation.

Reconciliation can be sped up with accounting software, but for best results, it should still be done by business owners or dedicated bank reconciliation services.

Table of Contents

Introduction: What is Bank Reconciliation?

What Causes Discrepancies in Bank Reconciliation Statements?

Five Steps of Bank Reconciliation

How Often Should You Conduct Bank Reconciliation?

Conclusion

Introduction: What is Bank Reconciliation?

Bank reconciliation is a process of comparing a company's bank statements to their books (also called "general ledgers") to make sure that every transaction is accounted for. Internal business records may include the general ledger, balance sheet and check registers.

Reconciling accounts helps businesses to identify whether changes in accounting are required. This is done to guard against fraud, maintain accurate records, and resolve various issues or discrepancies.

Ultimately, the ending balance of a bank account should equal the balance on the bank reconciliation statement (BRS). The BRS is a document that compares the cash balance of a business' balance sheet to the bank statement's corresponding amount.

Note that the ending balance on the bank statement and the book balance often do not match. Typically, you will need to adjust the book balance so it conforms to the statement.

Furthermore, while some businesses manually keep their records, many use bookkeeping software, which makes the process simpler.

Most of these software solutions – such as Xero, Cashbook and Blackline – integrate the business' bank accounts and provide all the records and data in one place. They automatically receive data from the most recent bank statements the moment they become available.

What Causes Discrepancies in Bank Reconciliation Statements?

A discrepancy is an inconsistency. For example: a bank statement with a different balance than a company's account records. There are a few common causes of discrepancies in bank reconciliation:

• Deposits in transit

• Outstanding checks

• Bank service charges

• Electronic deposits & charges that have not yet been recorded in the company's ledger but appear on the bank statement

• Exchange rate variations for international transactions

• Interest income

For example: your earned interest payments will be reflected in the bank statement, but not your general ledger at the end of the month.

The Five Steps of Bank Reconciliation

Completing a BRS requires the statements of both the current and previous months, including the account's closing balance.

Your accountant will typically prepare the statement using all the transactions through the day before, since transactions might still be occurring on the statement date.

Where you begin your reconciliation depends on when your books were last balanced. If you are not sure of the date, try to determine the last time your books matched your bank account balance and start there.

With that, let's dive into the steps of bank reconciliation.

1. Locate & Prepare Your Documents

Source documents are crucial to reconciliation and should be maintained electronically or in binders. Companies' books or ledgers are typically kept in logbooks, accounting programs, or spreadsheets.

Step one is to access a list of your company's transactions. You can get this through a bank statement, online banking, or asking your bank to share information with the accounting software you use.

Make sure to consult your check register, receipts and business records to account for any transactions that are not recorded in your bank statement.

2. Review Checks, Debits & Deposits

For reconciling bank statements, a good place to start is the last time your business records' balance matched the bank statement balance. Once you've got all that information, you can follow these steps:

1. Review all checks, debits and deposits
   

2. Ensure that every deposit in your account appears as income or any other account head as required
   

3. Check that all debits (bank withdrawals) are recorded in your books. This includes items that may not have been in your general ledger, such as bank fees

4. Go through your check register for any outstanding checks or deposits in transit that could be causing discrepancies. For instance, a check you wrote might not have been cleared
   

5. Check for cash receipts that the bank did not automatically record

3. Adjust for Outstanding Checks

An outstanding check refers to a check that a company has issued and recorded in its general ledger, but has not cleared the bank account. That is, the check has not been cashed, so the amount has not been deducted from the bank account. Hence, the bank balance will be greater than its actual amount of cash.

When calculating the adjusted bank balance, the outstanding checks' total amount is subtracted from the bank statement's ending balance.

If a company decides to void an outstanding check, a cash debit entry needs to be made in the general ledger to increase the account balance.

4. General Ledger Adjustments

Even after adjusting for outstanding checks, your bank and book balance may not be in sync. This implies that your bank has made an adjustment to your balance that has not been accounted for in your general ledger.

Such missing adjustments usually include overdraft fees, interest income and service fees. The simplest way to locate these adjustments is checking the bank fees in the bank statement. You should also check for miscellaneous deposits and adjust your ledger to reflect them.

As an example: The bank charged you 25 USD in service fees, but paid you 10 USD in interest. Your general ledger balance will need to be adjusted by an extra 15 USD.

5. Compare End Balances

After you have matched all records and made the necessary adjustments, you will have to confirm that the end balances are the same. If they are still unequal, the process will have to be repeated to pinpoint the errors.

How Often Should You Conduct Bank Reconciliation?

Generally, bank statement reconciliations are done on a monthly basis, once bank statements are received.

Discrepancies between book balances and bank statements are common, and companies need to account for every discrepancy and adjust their ledger accordingly. Mismatched end balances can lead to hefty fines and audits.

Ideally, the bank statements should be reconciled every time a bank statement is received. That is, it can be done daily, weekly, or monthly. Companies with a high number of cash transactions should conduct reconciliations more frequently to avoid mistakes.

Before reconciliation, ensure that all transactions have been recorded right till the end of the bank statement. If this is not done, the accounting process will become more complicated.

Conclusion

Reconciling bank statements is crucial to maintaining a clean record of transactions, providing a clearer picture of financial health, and preventing small mistakes from snowballing into major concerns. The more frequently you do it, the more likely you are to thwart fraud and prevent serious errors.

It is important to note that what works for one business may not work for another. Find a system of tracking and reconciliation that works best for your unique business needs.

To streamline the process, you can approach a financial accounting company like NextGen Accounting. We specialize in providing solid documentation, matching 100% of bank statement transaction details against your entire general ledger. After the matching is done, we'll provide you with a report showing the percentage of data matches and any and all suspicious results.

Contact us for our services now!