What Is Bank Reconciliation?

Bank reconciliation is a procedure that companies should go through every month to verify that the amounts shown on their bank statements and the records kept internally by the company agree. Check registers, general ledger, and balance sheet are all examples of these types of records.

Because the closing amount shown on a company's bank statement and the company's book balance virtually never perfectly match one another, it is customarily necessary to amend the book balance so that it is in line with the bank statement.

Discovering and understanding these inconsistencies is the objective of carrying out a bank reconciliation. When all adjustments have been made, the amount shown on a bank reconciliation statement should be the same as the balance left in the bank account at the end of the day.

Why it's Important to Do Bank Reconciliations

Bank reconciliation is an essential tool for a company's internal financial control system since it ensures that all of its assets are accounted for correctly monthly. As a result, this helps guarantee that payments have been completed and that cash collected has been put into the bank. The book balance and the bank statement may not match exactly for several reasons, including the following:

• Outstanding checks
• Interest income
• Deposits in transit
• Bank service charges
• Charges and deposits made through electronic means that are shown on the bank account but have not yet been entered into the ledger for the company
• For instance, if you requested a wire transfer or a stop payment on a check, your bank may have charged you a fee for doing any of these things. After each month, any interest payments you receive will only be shown on the bank statement, not your company's general ledger.

Instructions on How to Perform Bank Reconciliation

In most cases, bank reconciliations are carried out every month after the receipt of bank statements. The procedure may either be carried out manually or with accounting software assistance. Most accounting software systems, such as Blackline, Xero, and Cashbook, have bank connections. This means that the platform digitally links with your bank and instantly collects data from your most current bank statements as soon as they are made accessible.

Prepare Your Documents

To account for any transactions that are not shown on the bank statement, you will need to review your company's records, including the check register and receipts, before beginning the bank reconciliation process. These source materials are necessary for reconciliation and should be kept in binders or stored online.

Examine the Cash, Checks, and Debits in the Account

When doing bank reconciliation, it is helpful to choose the most recent occasion on which the amount shown on your company's records and the balance shown on your bank statement was the same as the beginning point. When you have all of this information, the following important actions need to be taken:

• Examine all of the deposits, checks, and debits in the account.
• Check your account after each deposit to be sure it shows up as revenue.
• Ensure that your company's records reflect each and every withdrawal (or debit) made from the bank. This includes bank fees that may not have been recorded in your regular ledger at the time.
• Examine your check register to see if any deposits are still being processed or checks are still pending, which might throw off your calculations. For instance, it's possible that you accepted checks on the day that the bank statement was closed or that a check you made very recently hasn't been cleared yet.
• You should go through your records to see whether there were any cash receipts that the bank did not immediately report.

Adjust for Outstanding Checks

When determining the adjusted bank balance during bank reconciliation process, total amount of checks that have not yet been cashed is deducted from ending balance shown on bank statement. If, on the other hand, the company chooses to cancel an outstanding check, you are obligated to record a cash debit in the general ledger to bring the account balance up to its previous level.