Bookkeeping 101: Bank Reconciliation

What is a bank reconciliation statement?

A bank reconciliation statement is a financial document that compares an account’s balance on your company’s books to the balance in that account according to your bank statement.

A bank reconciliation statement typically has two parts. The first part starts with your bank account balance and then adds or subtracts any transactions recorded in the company’s cash account on its books that haven’t yet cleared the bank. The result is your company’s adjusted cash balance.

The second part starts with your company’s cash account on its books and then adds or subtracts any transactions recorded by the bank that have not yet been input into your company’s bookkeeping software. The result of this calculation should be the same adjusted cash balance you calculated in the first part.

Why is bank reconciliation important?

Bank reconciliation is important because it is the first step in ensuring that your company’s books are accurate.

Bookkeeping errors are not uncommon, and they can easily be caught by reconciling your cash accounts to their statements at least every month, if not more often.

Bank errors are rarer than bookkeeping errors, but they do occur. And frequently reconciling your bank account balance to your statement can help you uncover these errors when they do arise so you can bring them up with your bank for correction.

How do you reconcile a bank statement?

The first step in reconciling your bank statement is to obtain your latest bank statement and note the period it covers.

Then, open up your bookkeeping software and pull up the register of all entries to your cash account balance for the period covered by your bank statement.

Now, compare the transactions in your software with the transactions indicated on your bank statement and note any transactions that are recorded in one record—either your software or your statement—but not in the other.

For example, let’s say that your business checking account has a balance of $10,000 according to its statement, but a balance of $11,000 according to your books. In comparing the transactions between the two records, you notice these three differences:

• A $900 check to your company that you deposited and recorded in your books, but that has not yet cleared the bank
• A $120 service fee indicated on your bank statement that you have not yet recorded in your books
• A $20 interest payment from your bank that you have not yet recorded in your books

Once you’ve done this work, prepare the first part of your bank reconciliation statement, which starts with your bank statement balance and adds or subtracts the transactions recorded only in your bookkeeping software. Using the example above, this part of your bank reconciliation statement would look like this:

Now, you would create the second part of your bank reconciliation statement.  This part starts with your cash balance on your books, to which you add or subtract the transactions found on your bank statement, but not currently on your books.  Following the previous example, this part would look like this:

Since your adjusted balance in both parts matches each other, you can be confident that you’ve prepared your bank reconciliation statement correctly.

Finally, you record the necessary journal entries to adjust your current balance on your books to match the adjusted balance from your bank reconciliation statement. In this case, your entries would look like this:

If you haven’t reconciled your cash balance to your bank statement before, you will have to go back to the month in which you opened your bank account and perform this exercise for every month thereafter.

How often should you reconcile your accounts?

Historically, businesses would reconcile their accounts monthly when the bank sent a physical statement. However, the digital era has made it easier for businesses to pull data from a banking period and reconcile accounts as they go.

At the very least, you should reconcile your accounts monthly. However, you may decide to set up a weekly reconcile meeting to download the statements and review your ledgers. Some companies even reconcile their accounts daily if they have a high number of transactions.

By reconciling your accounts regularly, you won’t have a huge build-up of statements and ledgers that need adjusting. This proactiveness will prevent you from logging long hours each quarter (or even at the end of the year) as you try to match up what your bank says compared to your ledger.

Bank reconciliation is one of the least glamorous parts of running a business. However, this practice is essential if you want a reliable view of your finances.