Bank reconciliations are one of the most important parts of your closing process to produce financial statements. We’re going to use the example of a company called GadgetFlow Inc. to walk through the steps of reconciling a bank account.
This guide is also related to our articles on understanding journal entries in accounting, understanding and calculating ebitda, and how to read a cash flow statement.
This guide covers:
- Adjusting for Bank Transactions
- Finalizing Reconciliation
- Reviewing Reconciliation Adjustments
- Reflecting on Learnings
Let’s dive into the steps for a proper reconciliation!
Gadget Flow Reconciliation
GadgetFlow Inc. is getting its finances in order and preparing for a reconciliation.
This process starts by looking at two key things: the ledger balance and the bank statement.
The ledger balance is where all the company’s money moves are written down—like sales, buying stuff, and paying out.
The bank statement is the bank’s side of the story, showing deposits, money taken out, and any fees the bank charges.
The goal is to spot any mismatches between the company’s books and the bank’s records. This could be due to timing differences, fees the bank charged that you didn’t know about, or mistakes in recording transactions.
The Bank Reconciliation
GadgetFlow is ready to begin reconciling. Here are the steps.
Step 1: Matching Deposits
It’s typical to start with deposits and then move on to withdrawals. Deposit reconciliations go like this.
Gather Documents: The finance team at GadgetFlow Inc. begins by collecting the latest bank statement and the cash receipts journal. This is the starting point for reconciling the company’s bank account.
Compare Entries: They meticulously check each entry in the cash receipts journal against the bank statement. Every deposit that GadgetFlow Inc. recorded over the month is compared to ensure the bank has also recognized these cash inflows.
Identify Discrepancies: During their comparison, the team notices a discrepancy: a significant deposit of $10,000 made on September 30th is missing from the September bank statement. This scenario is typical of deposits in transit, where the timing of the bank’s processing doesn’t align with the company’s records.
Adjust for Timing Differences: To resolve this, GadgetFlow Inc. notes the $10,000 as a deposit in transit. This adjustment ensures that their books will reflect the accurate cash balance once the bank processes the deposit, likely appearing on the October statement.
Look Out For
- Unrecorded Deposits: Further scrutiny reveals an additional deposit of $2,500 on the bank statement that wasn’t in GadgetFlow Inc.’s journal. This oversight is corrected by adding the forgotten transaction to the company’s records, ensuring no revenue goes unaccounted for.
- Bank Errors: Lastly, the team encounters a $5,000 deposit listed in their journal that the bank recorded as $4,500. This discrepancy isn’t due to timing but appears to be a bank error. GadgetFlow Inc. prepares to contact the bank to address and correct this mismatch, providing all necessary documentation to facilitate the resolution.
By carefully following these steps and addressing each discrepancy with precision, GadgetFlow Inc. effectively reconciles its bank account, ensuring the company’s financial integrity.
Step 2: Analyzing Withdrawals and Checks
This step is all about looking at the money GadgetFlow Inc. spent and making sure it matches up with what’s recorded. Here’s how to do it:
Match Transactions: The team undertakes a thorough comparison of every withdrawal and check listed on the bank statement against the entries in their cash payments record. This process ensures that all automatic payments and checks issued by GadgetFlow Inc. are accounted for correctly.
Look out for
- Outstanding checks: Upon review, the team notes several checks issued in the last week of September, totaling $8,000, that have not yet appeared as withdrawals on the bank statement. These are recognized as outstanding checks. The finance team understands these amounts have been deducted from GadgetFlow Inc.’s records but are not yet reflected in the bank’s records due to the checks not being cashed.
- Bank or ledger errors: The comparison reveals two main discrepancies:
- A payment to a supplier for $3,500 is recorded in GadgetFlow Inc.’s cash payments journal but appears as $3,000 on the bank statement. This discrepancy is flagged for further investigation with the bank, suspecting a possible bank error or miscommunication with the supplier regarding the payment amount.
- The team also discovers an automatic payment for utilities of $1,200 that was not recorded in GadgetFlow Inc.’s cash disbursements journal. It appears this was an oversight, and the payment was made directly by the bank as per an automatic payment arrangement. The finance team updates their records to include this payment, ensuring their bookkeeping accurately reflects all expenditures.
Step 3: Adjusting for Bank Errors and Adjustments
For GadgetFlow Inc., Step 3 is all about fixing bank mistakes and updating the books. This is key to keeping your finances on point. Let’s dive into how to handle this:
Adjusting for Bank Errors
- Identify Bank Errors: The GadgetFlow Inc. team reviews their bank statement line by line against their own records. They’re on the lookout for transactions that don’t match up, such as incorrect amounts or unauthorized transactions that aren’t attributable to timing differences or pending status.
- Verify with Documentation: Upon identifying a potential error, such as a supplier payment processed by the bank for $2,000 instead of the correct amount of $2,500, the team gathers all relevant documentation—receipts, invoices, etc.—to verify the accuracy of their records against the bank’s entry.
- Communicate with the Bank: With evidence in hand, GadgetFlow Inc. contacts the bank to address the discrepancy. For instance, after presenting the correct invoice details for the aforementioned supplier payment, the bank acknowledges the mistake and agrees to correct the amount, ensuring it matches GadgetFlow Inc.’s actual transaction.
Bank Fees and Interest Income
- Account for Bank Fees: The reconciliation process reveals several bank fees that GadgetFlow Inc. had not yet recorded, including a monthly account maintenance fee of $35 and an overdraft fee of $15. These fees are added to the company’s books, adjusting the cash balance accordingly.
- Record Interest Income: Additionally, the bank statement shows an interest income of $50 earned on GadgetFlow Inc.’s account balance. Since this income was not previously recorded in their books, it is now added to the cash receipts, reflecting an increase in the cash balance.
Other Adjustments
- Electronic Funds Transfers (EFTs) and Direct Deposits: The team verifies all EFTs and direct deposits listed on the bank statement. They discover an EFT payment to a vendor of $1,200 that hadn’t been recorded. This oversight is corrected by adding the transaction to their books.
- Correcting Entries: After thoroughly reviewing the bank statement and identifying discrepancies, GadgetFlow Inc. makes the necessary adjustments in their ledger. This includes correcting any previously identified bank errors, recording overlooked transactions, and adjusting for bank fees and interest income, ensuring their ledger perfectly aligns with the updated bank statement.
Step 4: Finalizing the Reconciliation
Here’s how to wrap up your bank reconciliation for GadgetFlow Inc., to make sure your bank and book balances match, showing your finance records are spot on.
Ensuring the Adjusted Bank Balance Matches the Adjusted Book Balance
- Review Adjustments: The finance team begins with a comprehensive review of all adjustments made during the reconciliation process. This includes verifying entries for outstanding checks, deposits in transit, corrected bank errors, bank charges, and accrued interest.
- Calculate Adjusted Balances: To arrive at the adjusted bank balance, GadgetFlow Inc. takes the ending balance from the bank statement, adds deposits in transit (e.g., a $10,000 deposit made on the last day of the month that hasn’t cleared yet), and subtracts outstanding checks (e.g., several checks totaling $8,000 that haven’t been cashed by recipients). For the adjusted book balance, they start with the ledger balance and make adjustments for transactions identified during the reconciliation, such as adding interest income of $50 and deducting bank fees of $50.
- Compare Balances: The finance team then compares the adjusted bank balance with the adjusted book balance. If these balances match, it indicates a successful reconciliation. If there’s a discrepancy, the team is prepared to re-examine their reconciliation steps to identify and correct any errors.
Completing the Bank Reconciliation Statement
- Document the Process: GadgetFlow Inc. prepares a bank reconciliation statement that acts as a summary of the reconciliation process. This document outlines the starting balances, details all adjustments made, and confirms that the adjusted balances are in agreement.
- Include Supporting Details: In their reconciliation statement, the team meticulously documents each adjustment, including the nature of the adjustment (e.g., “Deposit in Transit for $10,000, dated September 30”), the amount, and relevant transaction dates.
- Final Review and Approval: Before finalizing the reconciliation statement, it undergoes a thorough review for accuracy. GadgetFlow Inc. employs a policy where a senior finance team member or manager reviews and approves the reconciliation statement. This step is critical for validating the accuracy of the reconciliation and for maintaining financial integrity.
By closely following these structured steps and ensuring detailed documentation, GadgetFlow Inc. effectively completes their bank reconciliation process.
Conclusion
Let’s wrap up what we learned from GadgetFlow Inc. about bank reconciliation. It’s much more than making sure your bank and book balances match. It’s crucial for your business’s health. Reconciliations help you:
Catch Problems Early: This process helps you spot fraud, avoid overdraft fees, and really see your cash situation. It’s about checking every transaction, from deposits to withdrawals, and making sure everything’s right, including for bank errors and fees.
Improve Your Finances: Every step, from noting checks that haven’t cleared to fixing mistakes, gives you a clear picture of where your money stands. It points out how you can do better with your finances.
Keep Your Business Strong: Regular checks keep your financial records straight and support smart decisions. It’s key for protecting your money and keeping your business on solid ground.
Take Action: What we’ve learned from GadgetFlow Inc. is a call to action. Regular bank reconciliation is not just good practice—it’s essential. It keeps you informed, secure, and ready for growth. Start making it a regular part of your business routine.
You should now be empowered and equipped to start making your own bank reconciliations. Next, check out our articles on what are back offices services, 19 top fractional cfo’s, and understanding prepaid expenses.
FAQ: Bank reconciliation examples
Here's some of the most commonly asked questions about bank reconciliation examples.
How Should a Bank Reconciliation Account for Timing Differences?
In bank reconciliation, timing differences occur when transactions such as deposits in transit or outstanding checks are recorded by the company but not yet reflected in the bank statement due to the bank’s processing times. To account for these timing differences, the reconciliation process should:
- Identify Timing Differences: Clearly identify transactions that are known to have occurred but are not yet processed by the bank. Common examples include deposits made towards the end of the month or checks issued but not yet cashed by the recipient.
- Adjust the Bank Statement: Add any deposits in transit to the ending balance of the bank statement and subtract any outstanding checks. This adjustment provides an adjusted bank balance that should match the company’s book balance once these timing differences are accounted for.
- Document and Review: Keep detailed records of these adjustments for future reference and review these items in subsequent reconciliations to ensure they have been cleared in the bank statement, adjusting as necessary.
How Should a Reconciliation Deal with Bank Errors?
When dealing with bank errors during reconciliation, the process should involve:
- Detection: Thoroughly review the bank statement and compare it with the company’s records to identify any discrepancies that might be due to bank errors, such as incorrect transaction amounts or transactions that the company did not authorize.
- Verification: Gather all relevant documentation, such as receipts, invoices, or transaction records, that can verify the accuracy of the company’s records and demonstrate the error made by the bank.
- Communication: Contact the bank with the evidence of the error. Provide them with clear documentation and explain the discrepancy, requesting an adjustment to correct the error in the bank statement.
- Adjustment and Follow-Up: Make a note of the bank error and the expected adjustment in the reconciliation process. Follow up with the bank to ensure the error is corrected in subsequent statements.
What Documentation Is Important in a Reconciliation?
Effective bank reconciliation relies on several key pieces of documentation to ensure accuracy and facilitate the identification and correction of discrepancies:
- Bank Statements: The most recent bank statement is essential for comparing the bank’s record of transactions with the company’s records.
- Company’s Financial Records: This includes the cash receipts journal and cash disbursements journal, which record all cash transactions made by the company.
- Previous Reconciliation Reports: Previous reconciliation reports can help identify unresolved items or continuing discrepancies from earlier periods.
- Invoices and Receipts: These documents support the transactions recorded in the company’s books and are crucial for verifying the accuracy of both recorded revenues and expenses.
- Check Register: The company’s check register is necessary for identifying any outstanding checks that have not been cashed and are therefore not reflected in the bank statement.
