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What Is A Bank Reconciliation And How To Do It Right

Bank reconciliations let you track where your money is going. And you can stop guessing how much money is in your account. Learn how to reconcile your bank account, which can help you save time and money come tax time.

By Melissa Pedigo • Oct 12, 2022

9 mins
Banking

Managing your accounting records is essential to running a business. 

Smart business owners use dedicated bank accounts for their businesses to know all the transactions that should appear in their bank statements. 

But that’s not all—they also carve out time to reconcile their bank records to understand their true cash position, manage cash flow, and correct any errors quickly. 

But what is bank reconciliation, why does it matter, and how does it work? 

Learn more about this critical accounting process in this definitive guide.

What is bank reconciliation?

A bank reconciliation is the process of comparing your business’s accounting records to the corresponding information on your bank records or statement for the same period. 

As a financial tool, bank reconciliations help you see if the bank statement and book balances match reality because they may have some differences from:

  • Outstanding checks: Checks that a recipient fails to deposit or cash  
  • Interest income: Earnings generated by certificates of deposit, savings accounts, or other investments
  • Bank service charges: Monthly fees, charges from overdrawing your account, or other bank charges
  • Deposits in transit: Cash and checks you receive but weren’t deposited in time to appear on the statement
  • Unrecorded charges and deposits: Electronic deposits and charges that appear on your company’s books but not the bank statement or vice versa

If you discover any of these or other discrepancies between the two cash balances, you’ll need to recheck your accounting records to be sure no money is “missing” from your business.

How often do you complete bank reconciliations?

Bank reconciliation frequency for your business depends on your transaction volumes. 

Ideally, you should perform bank reconciliation at least every month—especially if you do your bookkeeping yourself. A regular schedule ensures your unreconciled statements don’t pile up into a tedious, time-consuming task.

Large companies or enterprises usually have accounting departments with several people, including an accounting manager or controller overseeing the reconciliation process. 

If you have two or more bank accounts and have many transactions multiple times every day, you can find a good Certified Public Accountant (CPA) to reconcile your statements daily to ensure every number checks out and all your cash receipts hit your accounts. 

For example, a small online store with a few daily transactions could reconcile weekly or monthly compared to a busy restaurant or retail store, which processes many transactions and receives a lot of money.

Reasons for reconciling bank accounts

Besides giving you a complete and precise understanding of your business’s financial position, bank reconciliations help you: 

  • Know your business’s financial health: Timely bank reconciliations ensure your business’s cash records are accurate and help you manage your company’s cash flow. This way, you can know how much you have in the bank and reduce the occurrence of bounced checks or failed payments.
  • Spot any accounting errors or fraudulent transactions: Your bank statement shows every transaction, from withdrawals to forged checks, helping you catch manipulations and unusual fraud-related transactions.
  • Keep your books up to date and accurate: Your business has many stakeholders, from the IRS to shareholders to lenders. Reconciliation ensures your bank statements are accurate, up-to-date, and ready for tax time, shareholder presentations, or lender reviews when applying for a business loan.
  • Identify errors and fees: If there were errors when recording checks in your books or your bank made mistakes in service charges or penalties, you can correct them by looking at the amount on your bank statements. 
  • Explain discrepancies in your statement or check register: Reconciliation shows items you should record in the check register and those yet to be recorded by your bank. This way, you can update your books to include missing details like bank fees or interest payments earned and verify that they display the same balance.
  • Foster business confidence: Old or incomplete data may result in misinformed business decisions. Reconciliation ensures your data is up-to-date and fosters business confidence between you and your vendors, customers, and shareholders.
  • Simplifies accounting: As your business grows, you may opt for the accrual accounting method, which records revenue and expenses when the transaction occurs. Accountants prefer this method to record when cash comes in or goes out as it provides the most realistic picture of a business’s actual financial position. 

How to reconcile a bank account

If you’ve never done bank statement reconciliation before, you might feel nervous or intimidated by the process. 

Bank reconciliation is easier to do if you have proper, organized bookkeeping or accounting procedures and a business account for DIY accounting to categorize your expenses and track any pending business transactions.

To get started, you’ll need your bank statement and internal accounting records, then: 

  • Compare your bank statement and business records
  • Make adjustments
  • Compare adjusted balances

Let’s unpack these three steps.

1. Compare bank statements and business records

Typically, your general ledger contains records of all your cash and check transactions from your check register. Your bank maintains similar records of your business checking account and provides a statement of all transactions that impact your bank account each month.

When you get your bank statement, compare and match each transaction and ending balance to your accounting records to confirm that they’re equal. 

For most business owners, the balances often don’t match owing to slight discrepancies like unrecorded charges or deposits, outstanding checks, and more.

Comparing your bank statement and check register squares away such discrepancies for more accurate accounting.

2. Record reconciliations and make adjustments

You’ve figured out why your accounting records and bank statements don’t match.

The next step is to adjust any debits and credits in the general ledger—like bank fees and interest earned. As you do this, note and investigate any differences and give specific explanations for each.

You can work off a monthly bank reconciliation template to make things easier and help you resolve any errors. If you find any missing or unfamiliar transactions, flag them for further review.

How to adjust your business records:

If items in your bank statement aren’t recorded in your books, you must adjust your business records. Examples of such transactions include:

  • Bank charges: Fees your bank charges for processing electronic transfers, overdrafts, debit card transactions, ATM withdrawals, and other checking account activities. Subtract bank charges from your books to match the statement balance.
  • Interest income: Earned interest accrues on your account balance but doesn’t appear in your business records. Adjust your books to reflect the interest income on your bank statement.
  • Non-Sufficient Funds (NSF) checks: These are checks you wrote that your recipient couldn’t cash because your account is low on funds. You may have recorded them in your business records, but they won’t reflect in your bank statement because the check bounced back to you.
  • Errors of omission: These errors occur when you forget to record a transaction that’s already happened. Adjust your books to match the bank statement if the transaction isn’t fraudulent. Contact your bank if you see a suspicious charge you cannot verify.

How to adjust your bank statement:

Some transactions may also appear in your business records but don’t show up on your bank statement because they happened too close to the statement date. Two such transactions are:

  • Outstanding checks: Checks you wrote and recorded in your check register, but they don’t appear in your bank statement until the following month. Adjust your bank statement to reflect these checks and subtract their amounts from the statement balance.
  • Deposits in transit: These are checks you received and entered in your business records, but they don’t appear in your bank statement until the following month. Adjust the statement balance by increasing the total deposit in transit to reflect the cash in your account.

3. Compare adjusted balances

Next, compare the adjusted balances from your business records and your bank statement to ensure they are equal. 

If the sums don’t match, recheck each entry to spot the discrepancy, double-checking your adjustments to ensure you document each transaction in your statement and check register. 

Once the balances match, you should have an accurate, current picture of your business’s bank account balances.

Example of a bank reconciliation

Here’s a quick bank reconciliation example using figures from a hypothetical online store.

  • Suppose you run an online candy store and you opened your bank account with a deposit of $5,000 on April 2.
  • That same month, your business wrote two checks totaling $2,500 and made a $1,000 deposit at the end of the month on April 30.
  • As of April 30, your business records or cash account show a debit balance of $3,500 ($5,000 – $2,500 + $1,000 = $3,500). 

But your bank statement on April 30 reflects a balance of $2,987.50.

Your business records and bank statements show different balances, so you must reconcile them. To do this, you’ll compare the details of both records.

Let’s say that: 

  • The bank is yet to process the April 30 deposit of $1,000, so it’s not reflected on the bank statement.
  • The bank charged you a service fee of $12.50, which also doesn’t appear on your business records.
  • One of the two checks, made out for $500, is still uncashed and doesn’t appear on your bank statement.

To reconcile bank statements, you’ll need to fill in the missing transactions so your balances match. To do this, you’ll:

  • Reduce the cash general ledger balance by $12.50 to reflect the bank charges, making the new balance $3,487.50 ($3,500 – $12.50 = $3,487.50).
  • Increase the bank statement balance by $1,000 to reflect the deposit in transit. Then reduce it by $500 to account for the uncashed check. The adjusted bank statement balance will now read $3,487.50 ($2,987.50 + $1,000 – $500 = $3,487.50) .

Your business records and bank statement now have a balance of $3,487.50, so the bank account is reconciled.

Eliminate surprises due to mismatched records

Bank reconciliation is a relatively quick and straightforward process, depending on your transaction volumes. It ensures accuracy and helps you attain your business’s financial goals. 

As you plan to reconcile your accounts, consider finding a suitable system that tracks all your transactions. You can try accounting software to ease recording transactions but stick with one that lets you keep the most accurate records.

Melissa Pedigo, CPA and writer on the Lili Blog

Written by
Melissa Pedigo

Melissa Pedigo has been a CPA for over 20 years. Now a full-time writer with a vast knowledge of U.S. tax and accounting, she’s able to write about tax and finance topics from a unique perspective…as an industry expert.

 

When she’s not writing or being an accounting nerd, you’ll find her watching and playing tennis, reading, tending to her half-grown garden, and studying foreign languages. You can find her on Twitter, Linkedin or at acpawrites.com.