How To Do Bank Reconciliation for Your Business

Bank reconciliation is the process of balancing a business’s closing internal book balance (the cash balance according to its accounting records) with the closing balance on its bank statement.

Reconciliations are typically done on a monthly basis to ensure that all deposits, withdrawals, and bank fees are accounted for. Discrepancies between a bank statement and book balance are commonplace, but businesses must account for each one and adjust the general ledger accordingly. Performing a regular bank reconciliation enables a business to locate any missing funds, prevent fraud, and verify the cash flow on its balance sheet.

What Is Bank Reconciliation?

Bank reconciliation is a process businesses should undertake each month to ensure that the amount reflected in their bank statements matches their internal business records. These records include check registers, the general ledger, and the balance sheet.

The ending balance on the business’s bank statement and its book balance are almost never exactly the same, so you typically need to adjust the book balance to conform to the bank statement. The purpose of performing a bank reconciliation is to find and understand these discrepancies. After all adjustments are made, the balance on a bank reconciliation statement should equal the ending balance of the bank account.

Why Bank Reconciliation Matters

Bank reconciliation is an important internal financial control tool to ensure that all of a business’s assets are properly accounted for each month. This helps ensure payments have been processed and cash collections have been deposited into the bank.

There are several reasons why the bank statement and book balance may differ, including:

• Outstanding checks
• Deposits in transit
• Interest income
• Bank service charges
• Electronic charges and deposits that appear on the bank statement but have yet to be recorded in the business’s ledger

For example, if you ordered a wire transfer or stopped payment on a check, your bank may have charged fees for this. Similarly, any interest payments you earned will only be reflected in the bank statement and not your business’s general ledger at the end of the month.

How To Do Bank Reconciliation

Bank reconciliations are typically done each month once bank statements are received. The process can be done manually or using accounting software. Most accounting software solutions—like Blackline, Xero, and Cashbook—offer bank connectivity, meaning the platform integrates digitally with your bank and automatically obtains data from the most recent bank statements as soon as they are available.

Prepare Your Documents

When performing a bank reconciliation, you’ll need to consult your business records, check register, and receipts to account for any transactions not recorded in the bank statement. These source documents are essential to reconciliation and should be maintained in binders or electronically.

Review Deposits, Checks, and Debits

A good starting point for a bank reconciliation is to use the last time the balance on your business records matched the balance on your bank statement as a starting point. Once you have this information, here are some key steps to follow: 

1. Review all deposits, checks, and debits.
2. Make sure each deposit appears as income in your account.
3. Check to see that all bank withdrawals (debits) are recorded in your business books. This includes items like bank fees, which may not have been recorded in your general ledger.
4. Scan your check register for any deposits in transit or outstanding checks that could be throwing you off. For example, you may have accepted checks on the closing date of the bank statement, or a check you recently wrote hasn't been cleared.
5. Check your receipts to find any cash receipts that were not automatically recorded by the bank.

Adjust for Outstanding Checks

In bank reconciliation, an outstanding check is a check the business has issued and recorded in its general ledger accounts, but has not yet cleared the bank account on which it is drawn. This means the depositor has not yet cashed the check, so the amount has not been deducted from your business’s bank account. Consequently, the business’s bank balance will be greater than its true amount of cash.

In the bank reconciliation process, the total amount of outstanding checks is subtracted from the ending balance on the bank statement when computing the adjusted bank balance. In this case, there is no need to adjust the business’s general ledger accounts since the outstanding checks were recorded when they were issued. However, if the business decides to void an outstanding check, you must make a cash debit entry in the general ledger in order to increase the account balance.

The following is an example:

Company X recorded $250,000 in checks drawn from its general account in the month of February. During the January bank reconciliation process, Company X determined it has a balance of $30,000 in outstanding checks. The bank statement received by Company X showed checks paid of $200,000 in February. Company X’s outstanding checks at the end of February would be calculated as:

Look Out for General Ledger (G/L) Adjustments

Even after accounting for outstanding checks, it’s possible for your bank and book balance to still not be in sync. This means the bank has made an adjustment to your balance that has not yet been recorded in your general ledger (G/L).

You’ll need to account for these fees in your G/L to complete the reconciliation process. The easiest way to find these adjustments when completing a bank reconciliation is to look at the bank fees in your bank statement. Also, check for any miscellaneous deposits that haven’t been accounted for. Once you’ve located these items, you’ll need to adjust the G/L balance to reflect them.

For example, say the bank charged your business $25 in service fees but it also paid you $10 in interest. You’ll need to adjust your G/L balance by an additional $15. Once you’ve made these final adjustments, the bank and book balance should be reconciled.

Frequently Asked Questions (FAQs)