How to Do Bank Reconciliations

Running a small business means keeping a close eye on your money – both what’s coming in and going out. Without this, you might run short on cash or miss chances to grow.

Bank reconciliation is your go-to tool for staying on top of your finances. This guide will make bank reconciliation simple, showing you its benefits and how it’s a key part of managing your money.

This article is also related to our guides on understanding journal entries in accounting, understanding gross vs. net profit, and how to read a balance sheet.

Here’s what we’ll cover

• What bank reconciliation is
• Why it matters for your business
• Key terms to know
• Getting ready for bank reconciliation
• A step-by-step walkthrough of the process
• Tips for doing it quickly and correctly
• Advanced strategies and tools

Let’s get into how bank reconciliation can help you manage your business finances better.

Understanding Bank Reconciliations

Bank reconciliation might seem complex, but it’s basically checking that the money you think left your account matches what actually did. It’s about making sure your own financial records agree with your bank’s. This means comparing your own record of transactions with your bank statement.

Here are some terms you’ll run into

Bank Statement: A summary from your bank, showing all activity in your account over a certain period – deposits, withdrawals, fees, and interest.

Ledger Balance: Also called the book balance, it’s the total money recorded in your accounts, not yet adjusted for transactions the bank hasn’t processed, like outstanding checks.

Why Do Bank Reconciliations?

1. Catch Mistakes: Spot errors or unauthorized transactions. Catching these early saves you trouble later.
2. Know Your Cash Flow: Stay up to date on how much money you have, which is key for smart business decisions.
3. Spot Fraud: Quick detection of suspicious activity can prevent big losses.
4. Avoid Overdrafts: Knowing your true balance helps avoid fees and bounced checks.
5. Be Audit-Ready: For audited businesses, clean records show you’re on top of your finances and make audits smoother.

For small business owners, regular bank reconciliation is crucial. It’s an essential part of your month-end closing process, and the most important way to make sure that your financial statements are accurate.

Preparing for a Bank Reconciliation

Bank reconciliations should be done every month against the bank statements. Some companies need to reconcile every week or every day, although these forms of reconciliations would just mean looking at the current bank balance and not using an actual statement. 

To do a reconciliation against your monthly bank statements, you need to record every deposit, check, and electronic transfer into your accounting software. Regularly doing this keeps your finances accurate and helps catch any surprises.

What You Need to Start

• Bank Statements: Monthly summaries from your bank showing all account activity, including deposits, withdrawals, and any fees or interest.
• Accounting Records: Your own record of business transactions, usually in a cash receipts journal for deposits and a cash disbursements journal for withdrawals and payments. Your ledger balance or the balance in your accounting software reflects these.

Having these documents is essential. They let you compare and spot any differences between your records and the bank’s.

When to Do It

Typically, you’d reconcile your accounts monthly, after getting your bank statement. But, depending on your business and how many transactions you have, you might do it weekly or bi-weekly. The goal is to find and fix any discrepancies quickly, keeping your financial records accurate.

Tools to Help

Manual bank reconciliation can get tricky with more transactions. Luckily, there are tools and software to help:

• Accounting Software: Options like QuickBooks, Xero, and FreshBooks have bank reconciliation features, automating much of the process.
• Spreadsheet Programs: Microsoft Excel or Google Sheets can also work for manual tracking and comparison.
• Bank Reconciliation Software: Specialized tools offer features like real-time reconciliation and integration with various accounting programs.

Choosing the right tools can make bank reconciliation faster and more accurate, freeing up time to focus on your business. 

Doing Your Bank Reconciliation

The steps are pretty simple; compare deposits, compare payments, add interest, make sure everything is balanced.

Step 1: Compare Deposits

First, you need to match the deposits in your bank statement with what you’ve recorded, like in a cash receipts journal.

Look at your bank statement to find all deposit transactions for the period you’re working on.

Find these same entries in your cash receipts journal, checking that the amount, date, and source match up.

Finding Differences

While matching, you might see some discrepancies due to:

Timing Differences: Deposits made late in the month might show up in the next month’s bank statement because of processing times. These aren’t errors but timing issues that will fix themselves next reconciliation. Just make a note of these. Check in the next month’s reconciliation to ensure they’ve cleared.

Errors: Mistakes can happen on both sides. A deposit might be recorded wrong in your records or the bank might have processed something incorrectly. Figure out where the mistake happened. If it’s in your records, fix it. If the bank messed up, get in touch with them to correct it.

Successfully dealing with deposit discrepancies ensures your recorded cash balance reflects what’s actually in your bank. This step is straightforward but needs careful attention to detail.

Step 2: Compare Withdrawals

After checking deposits, the next essential step in bank reconciliation is reviewing withdrawals, checks, and debit transactions. This ensures all money that leaves your account is recorded correctly.

Focus on the withdrawals section, including checks you’ve written, direct debits, electronic transfers, and bank fees. Each withdrawal in your bank statement should match an entry in your cash disbursements journal or ledger, with the same amounts and dates.

Finding Differences

You might find transactions that don’t line up perfectly. These usually are:

Outstanding Checks: Checks you’ve issued that haven’t been cashed yet. They’re in your ledger but not the bank statement. Tracking these helps you know your real cash availability. Keep a list and watch their status. If a check hasn’t cleared in a long time, you might need to investigate if it was never cashed by your vendor, lost in the mail, etc.

Unrecorded Transactions: Withdrawals or debits on your bank statement not in your records. This could be forgotten bank fees, automatic payments, or recording mistakes. Add any bank statement transactions not in your ledger to your records. This keeps your bookkeeping accurate.

Comparing withdrawals, checks, and debits is detailed work but crucial. It helps you make sure your financial statements reflect your business’s true cash flow, catch any unauthorized transactions, and maintain accurate finances.

Step 3: Identify Bank Errors

Spotting and fixing bank errors is key during bank reconciliation. Banks are usually right, but mistakes happen. It’s crucial for small business owners to catch and correct these errors to keep their financial records accurate.

How to Spot Bank Errors

Errors can range from simple typos to wrong transactions. Here’s how to find them:

• Review Transactions: Go through your bank statement transaction by transaction, comparing each with your records to check for accuracy.
• Look for Odd Entries: Transactions that don’t match your records might be errors, especially if they’re unfamiliar. This includes strange fees, deposits you didn’t make, or unknown withdrawals.
• Check Amounts: Sometimes, the error is in the transaction amount, like depositing $1,000 but the bank records $100. Differences in amounts can signal a mistake.
• Verify Balances: If your calculated balance doesn’t match the bank’s after all adjustments, there could be an error.

Reporting Bank Errors

Found a mistake? Here’s what to do:

• Gather Proof: Collect any documents that prove your side, such as receipts, bank statements, and your financial records.
• Contact Your Bank: Call your bank’s customer service quickly. Describe the issue and provide evidence.
• Follow Up in Writing: After calling, send a written complaint with all details and copies of documents. Keep a copy for yourself.
• Watch Your Account: Keep an eye on your account and statements to make sure the bank fixes the error. They should update you on their investigation and adjust your balance if they find they made a mistake.

While rare, these errors can impact your business’s finances if not addressed. Stay sharp and reconcile your bank statements carefully to ensure your finances are in order.

Step 4: Adjust the Cash Accounts

Now that you’ve sorted out any differences, including bank errors, it’s time to update your cash accounts to show the real balance.

Making Adjustments

For Bank Fees and Interest: You might not have recorded these yet. Add any bank fees, which lower your cash, and any interest, which increases it.

For Errors: Where the mistake happened dictates what you do next. If the bank messed up, wait until they fix it. If you made the error, update your ledger accordingly.

Journal Entries Needed

The easiest way to adjust your bank rec adjustments are with journal entries. Make sure to attach all necessary documentation to your journal entry.

• Bank Fees: Make an entry that increases your Bank Fees Expense and decreases your Cash.
• Interest Earned: Make an entry that increases both your Cash and your Interest Income.
• Fixing Errors: The exact entry depends on the error, but you’ll adjust the impacted accounts to show the true transaction.

Step 5: Finalize the Reconciliation

This last step confirms your bank and book balances match after all adjustments, proving your financial records are accurate.

Verifying Adjusted Balances Match

• Calculate Adjusted Bank Balance: Start with your bank’s ending balance. Subtract checks not yet cashed and add deposits still processing. Fix any bank errors.

• Calculate Adjusted Book Balance: Begin with your book’s ending balance. Adjust for interest, bank fees, and any errors found and fixed.
• Compare Balances: If your adjusted bank and book balances match, you’re done. If not, double-check your work.

Preparing a Reconciliation Report

Any accounting software will create a bank reconciliation report. This report shows:

• The reconciliation period
• Ending bank statement balance
• Adjustments (outstanding checks, deposits in transit, corrections)
• Adjusted bank balance
• Ending book balance
• Adjustments (interest, fees, book corrections)
• Adjusted book balance

This statement is your record of the reconciliation and adjustments, useful for audits and financial reviews. 

After Reconciliation

Once balanced, file the reconciliation statement and all proofs. Keeping these records supports future audits or financial checks.

Finalizing with matching balances underscores the precision of your financial records and the value of regular reconciliations for your business’s financial health.

Best Practices for Bank Reconciliations

Efficient bank reconciliation keeps your financial records accurate and supports your business’s financial health. Here are top tips to make it smoother:

Regular Reconciliations

• Frequent Checks: Do it regularly. Monthly is common, but more often can help catch issues early.
• Set a Schedule: Stick to a regular schedule to ensure you always stay on top of it, even when busy.

Leveraging Software for Accuracy and Efficiency

• Use Accounting Software: Use software with bank reconciliation features to save time and reduce mistakes. It should match bank transactions with your records automatically.
• Integration: Pick software that works well with your bank and financial systems for easier reconciliation.
• Automate: Use automation for recurring transactions but review them for mistakes.

Training Staff on Procedures

• Educate Your Team: Make sure everyone handling finances understands how to do bank reconciliation and why it’s important.
• Clear Procedures: Have documented steps for the reconciliation process to ensure consistency and accuracy.
• Continuous Learning: Keep your team updated on new financial tools and best practices.

Adopting these strategies can make bank reconciliation more efficient and improve your financial management, keeping your business’s finances in good shape.

Integrating Bank Feeds Directly into Accounting Software

• Direct Bank Feeds: Connect your bank accounts to your accounting software for real-time transaction data, eliminating manual entry.
• Immediate Discrepancy Detection: Spot issues right away, helping you address unauthorized transactions or bank errors quickly.
• Simplified Cash Flow Management: Real-time data gives you a clear, current picture of your finances, aiding budgeting and forecasting.

Conclusion

This guide walked you through bank reconciliation, a key task to keep your small business’s finances accurate and healthy. Here’s a quick wrap-up:

• Understanding: We explained what bank reconciliation is and why it’s important.
• Preparing: Highlighted the need for the right documents, understanding your reconciliation period, and using software to make things easier.
• Steps: Showed how to compare deposits and withdrawals, and fix any differences or bank mistakes, keeping your cash accounts true to your business activity.
• Efficiency Tips: Talked about doing regular checks, using tech to your advantage, and training your team on reconciliation.

Bank reconciliation is more than another random task; it’s vital for your business’s financial integrity. Doing it regularly keeps your records straight, helping you make smart decisions. Embrace the tips and tech we’ve shared to keep your business financially sound.

Next, check out our articles on 10 best bookkeeping software, apps & tools to use in 2023, 16 best bookkeeping books to read in 2023, and how to read a cash flow statement.

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Author: Julia Kelly

Co-founder at Rigits

I write about how small business owners can better understand and utilize their financials for growth.

Julia Kelly