How To Complete a Bank Reconciliation Step By Step

Updated March 10, 2023

Though accounting software is widely popular with small business owners, companies still need to regularly compare their bank statements against their personal records. This process, known as bank reconciliation, ensures that the business records are correct and helps the business spot any discrepancies, errors or fraudulent charges. In this article, we'll define what bank reconciliation is, provide steps to accomplish it, list some common issues found while reconciling records and give an example of a bank reconciliation.

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What is bank reconciliation?

Bank reconciliation refers to the process of comparing a company's books with their bank statements to ensure that all transactions are accounted for. The process is a helpful way to keep accurate records, guard against fraudulent charges and resolve any other discrepancies or issues. Most companies perform bank reconciliation, or bank rec, at the end of every month, however, the frequency is largely dependent on the size of the company and the number of transactions that occur. For instance, some larger companies find it necessary to reconcile their records every day.

Regardless of the frequency, bank reconciliation should be completed regularly. Though some companies still keep their records manually, bookkeeping software is available that makes the process simple and efficient. Most of these programs integrate the company's bank accounts, providing all of the data and records in one place.

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How to complete a bank reconciliation procedure

Here are the steps for completing a bank reconciliation:

  1. Get bank records.

  2. Gather your business records.

  3. Find a place to start.

  4. Go over your bank deposits and withdrawals.

  5. Check the income and expenses in your books.

  6. Adjust the bank statements.

  7. Adjust the cash balance.

  8. Compare the end balances.

1. Get bank records

To reconcile your records, you will need access to a list of your transactions. You can get this information through online banking, a bank statement or by allowing your bank to share data with your accounting software.

2. Gather your business records

You will also need access to your company's ledger, or books. Typically, this information is kept in a spreadsheet, logbook or in an accounting program.

3. Find a place to start

Where you start will depend on when you balanced your books last. If you're uncertain, try to pinpoint the last time that your books matched the balance in your bank account and start from there.

4. Go over your bank deposits and withdrawals

Make sure that all of your bank deposits and withdrawals are accounted for in your bank statement. If there is an item missing, you will have to add it in.

5. Check the income and expenses in your books

Check your books against the bank statements, and make sure that every transaction is properly accounted for. If there is an unmatched item, find out why that is. Perhaps a payment has yet to clear or you forgot that you paid cash for something.

6. Adjust the bank statements

There are times when a bank statement will fail to accurately reflect a company's transactions. Common causes could be outstanding checks, bank errors or deposits that are still in transit. Whatever the reason, make the necessary changes to the bank statement.

7. Adjust the cash balance

You will also need to adjust your records to accurately reflect all of the company's transactions. You'll do this by making sure that all charges and deposits are accounted for in the company's cash account.

8. Compare the end balances

Once you have matched the records and made the adjustments, you'll need to confirm that the end balances are now the same and the reconciliation process should be complete. If they are still unequal you will need to repeat the process in order to find the error.

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Reasons to conduct bank reconciliation

There are many benefits to performing regular bank reconciliation. Some of these include:

  • Spotting theft and suspicious transactions

  • Being able to keep track of bank transactions, penalties and fees in the company books

  • Having accurate records of the business's receivables and accounts payable

  • The ability to detect issues like missed or double payments

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Common issues found during bank reconciliation

One of the primary reasons for performing a bank reconciliation is to be able to spot any issues. Here are some common problems that you will find during bank reconciliation:

  • Checks that are returned after being deposited: In some cases, the bank will decline the deposit of a check. This is usually because the check is drawing money from a foreign bank account. If this issue arises, you will have to reverse the entry signifying the failed deposit by giving a credit to the cash account, reducing the balance and increasing the debit in the account for accounts receivable.

  • Voided checks being cleared by the bank: If a check stays uncleared by the bank for an extended amount of time, you will likely void the check and create a replacement. However, occasionally the payee will still attempt to cash the original check. If the check was voided through the bank, they should refuse to cash it. If the bank wasn't told about the voided check, then you will need to apply a credit to the cash account as well as a debit explaining the payment.

  • Double payment: If you fail to communicate with the bank regarding a voided check, it could result in a double payment. In instances where the payee cashes a voided and replacement check, you will need to request repayment from the payee.

  • Missing and uncleared checks: There will usually be a few checks that have yet to be presented and/or cleared by the bank. For recent checks, continue reconciling them as uncleared checks. For checks that have been uncleared for an extended amount of time, you will probably need to make sure that the check was received by the payee, and in some cases, void the check and then issue a replacement.

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Example of a bank reconciliation

A new company has opened a bank account with a deposit of $10,000 on May 2. That same month, the company wrote four checks totaling $5,000 and made a $2,000 deposit at the end of the day on May 31. Therefore, as of May 31 the company's books, or cash account, are showing a debit balance of $7,000. However, the bank statement on May 31 is reflecting a balance of $5,975.

The books and the bank statement are showing different balances and need to be reconciled. In order to accomplish this, they must compare the details of both records. Let's say that:

  • The May 31 deposit of $2,000 has yet to be processed by the bank, so it is missing from the bank statement.

  • The bank has charged a service fee of $25, which is missing from the company's books.

  • One of the four checks, made out for $1,000, that was written that month remains uncashed and is missing from the bank statement.

In order to reconcile, they will need to fill in the missing transactions so that both balances match. To do this they will:

  • Decrease the cash account balance by $25 to reflect the bank's service fee, making the new balance $6,975.

  • Increase the bank statement balance by $2,000 to reflect the deposit and decrease it by $1,000 to account for the unprocessed check. The adjusted bank statement balance is now $6,975.

The bank statement and the company's books now have a balance of $6,975 so the bank statement is reconciled.

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