Bank reconciliation is the process of comparing your company’s bank statements to your own records, ensuring all transactions are accounted for. An effective bank reconciliation process can identify any discrepancies in your company's records, and help prevent fraud and theft from your bank account.
If you weren’t to reconcile your accounts, you could potentially lose a lot of money and any fraud or theft that’s happening can be left to continue.
These implications show why reconciliation represents such a critical part of maintaining accurate financial records for your business and why it needs to be part of your accounting process.
In this article, we cover everything from what bank reconciliation is, to what to include in a bank reconciliation statement and how often you need to do it. To take better care of your bank account for your business accounts, keep on reading.
Table of Contents
- What is bank reconciliation?
- Why is bank reconciliation important?
- How do you do a bank reconciliation?
- Summary: Bank reconciliation is a critical part of your accounting process
What is bank reconciliation?
As outlined above, bank reconciliations is a process that compares and matches the financial records of a business with the bank statements to ensure they are consistent and accurate. It verifies that the purchases and transactions made align with those recorded by the bank for the same period. By doing so, you can identify any omissions or errors in the data and reconcile them by making necessary adjustments. While some errors can be caused by fraud or theft, other likely causes can include timing differences, errors in reading transactions, bank fees and other factors.
The bank reconciliation process is completed periodically to verify that all transactions, such as checks, withdrawals, deposits, and other types of payments, are accurately documented in both systems.
Critically, bank reconciliation also helps businesses identify any discrepancies between bank statements and accounting entries, which is essential to maintaining accurate financial records, especially for audits and other official inquiries. It also helps businesses adhere to necessary accounting standards. This is especially useful for large organizations with complex cash transactions often.
Finally, bank reconciliation is an essential tool in detecting and preventing fraud. By comparing the transactions included on a bank statement to those recorded in accounting entries, it can be easier to spot any mistakes or suspicious activity that may need further investigation. If you don't know what is going in and out of your bank account and how your bank balance fluctuates, you could end up missing vital information.
What are the 3 types of bank reconciliation?
There are three types of reconciliation. These are Internal Reconciliation, External Reconciliation, and Aggregate Reconciliation.
- Internal Reconciliation: This type of reconciliation compares entries between departments within the same company or organization.
- External Reconciliation: This type of reconciliation involves comparing accounts between different entities, such as a business and its bank, or between two different businesses.
- Aggregate Reconciliation: This type of reconciliation combines multiple accounts and verifies them against a single set of records or documents. Aggregate reconciliation is often used to verify the accuracy of financial statements and ensure compliance with regulations such as Sarbanes-Oxley (SOX).
It's vital businesses know what type of reconciliation to use and the bank reconciliation process flow in order to be as efficient as possible.
Examples of bank reconciliation
To clarify the reconciliation process, let's look at a bank reconciliation example:
Company A has a checking account with ABC Bank. At the start of the month, their accounting records show that they have $10,000 in cash. During the month, they make several deposits into this account and also write checks to pay for various expenses. At the end of the month, they receive their bank statement from ABC Bank, which shows an ending balance of $9,500.
Company A can then begin reconciling the two figures by looking for any outstanding deposits due that have not yet been recorded in their accounting records and subtracting any expenses that have not yet been processed. They can also investigate any fee charges or interest payments from their bank statement that need to be adjusted in their own books. After taking into account all of these factors, Company A should have an accurate figure for their ending balance that they can enter into the general ledger.
Let's take a look at another bank reconciliation example in which a discrepancy is discovered and resolved through the bank reconciliation process:
Company B recently completed its bank reconciliation and discovered that the ending balance in its book records included a $500 discrepancy from the balance on its bank statement. After carefully reviewing both documents, Company B noticed several checks totaling $150 had not yet been deposited into their account, so they made an adjustment to their book balance to increase their ending balance by this amount. Additionally, it was discovered that a check had been accidentally entered twice in the book records, resulting in an overstatement of $350.
After making the necessary adjustments to their ending balance, Company B was able to reconcile the difference between their book records and bank statement by entering $150 into accounts receivable and reducing the bank account balance by $350.
While we've used simple figures here for clarity, you only need to add a few zeros to the end of the amounts to highlight just how vital regular and accurate bank reconciliation is.
Why is bank reconciliation important?
At its most basic, the bank reconciliation process helps ensure that the total amount of money reported by the business’s accounting system agrees with the actual money in its bank account. This means no funds will be unaccounted for and purchases can be verified.
Discrepancies between these two amounts can occur for a variety of reasons. Common discrepancies include:
- Unrecorded transactions, such as checks that have been written but not yet recorded in the company’s accounting system.
- A recording error, either in the bookkeeping or by the bank itself.
- Deposits that have been made to the account but not cleared.
- Bank fees or interest that have been applied to the account but not yet recorded in the accounting system.
- Fraudulent activity resulting in a withdrawal from the bank account that was not authorized by the business.
By performing regular bank reconciliations, businesses can identify discrepancies and take corrective action before they become more serious issues, making accurate bank reconciliation statements a critical part of the accounts receivable and credit control process.
How do you do a bank reconciliation?
The bank reconciliation process involves several steps. These tend to be:
Review the bank statement:
The first step in performing a bank reconciliation is to review the bank statement for any discrepancies or unidentified transactions. This includes reviewing all deposits, withdrawals, fees, and other bank charges made.
Compare the bank statement to the internal records:
In this step, you will compare your cash book and internal accounting records with those on the bank statement. Look for any differences in amounts, dates, or checks that have been written but may not appear on the bank statement.
Adjust the internal records:
Following the review and comparison of your internal bank records, with those on the bank statement, you will adjust your accounting records to reflect any discrepancies or unidentified transactions.
Reconcile the accounts:
Once all differences have been identified and adjusted, it is necessary to reconcile cash balance shown on the internal records with those on the bank statement by summarizing all transactions that occurred during the period. This will ensure that your accounts are accurately balanced.
What is a bank reconciliation statement?
Once the accounts have been reconciled, it might be necessary to create a bank reconciliation statement. This summarises the differences in cash account records that were found and provides a clear and detailed explanation of the adjustments made to reconcile the records. The information in a bank reconciliation statement tends to include:
- The opening balance of cash as per the organisation's records
- Deposits in transit, so any deposits that haven't yet been reflected in the bank statement
- Any outstanding checks that haven't yet been cashed in to your business bank account
- Any bank errors such as incorrect charges or duplicate entries
- The adjusted cash balance which reflects the reconciled amount after the above has been accounted for.
Not only is the bank reconciliation statement important for your only personal records to see where the cash went, it can also act as a supporting document for any audits that might take place.
A bank reconciliation statement should be done at the end of every reconciliation to clear up any discrepancies and clarify unidentified transactions.
How often should you do bank reconciliation?
Best practice states you should reconcile your bank accounts at least every month.
Weekly reconciliation can be too granular and time-consuming for most businesses, but leave it too long and mistakes can be missed.
What happens if you leave it too long to do a bank reconciliation?
If left to build up for too long, errors and discrepancies can build up and may start to impact your business and cash flow. Consider how high your transaction volume is and find a reasonable medium that strikes a balance between being practical and taking over your time. Many choose to schedule reconciliation to take place prior to credit control meetings so the data is as up-to-date as can be.
This means aspects such as your bank statement balance and bank reconciliation statement will be relevant and any bank service fees or interest income from transactions will be accounted for. Thus, everyone will have a better idea of the company's more recent financial position and cash balance.
With so much to consider, this is where many companies decide to hire an expert company to reconcile their accounts, taking the stress away.
What is the journal entry for bank reconciliation?
The Journal entry for bank reconciliation typically involves recording the adjustments that have been identified during reconciliation. It is a double-entry system, meaning that two entries are made to record the transaction correctly.
What is the difference between the first and second entries?
The first entry records a debit to the cash account and a credit to the bank reconciliation account. The second entry records a debit to the bank reconciliation account and a credit to the cash balances of any other accounts impacted by the discrepancy (e.g., Accounts Receivable or Accounts Payable).
Eg if an outstanding check is identified, the entry would look like:
Debit: Outstanding check
Credit: Cash (Or accounts payable)
This shows the debit and credit, what is expected to enter the company's bank account and the bank transactions that will take place.
It’s advisable to consult with a financial professional to advise on the appropriate journal entries for your bank reconciliation adjustments. They will ensure all is as it should be and no data is incorrect or missing.
Summary: Bank reconciliation is a critical part of your accounting process
Accounting errors can impact your cash flow, customer service, and, ultimately, your bottom line. Bank reconciliation is an integral part of the accounting process to ensure accuracy across your financial statements.
By performing bank reconciliations regularly, you can identify errors and discrepancies before they become more significant problems and make sure that all of your accounts are accurately balanced.
Speak to an expert for your bank reconciliation
To further optimise your accounting process and, therefore, your cash flow, it’s worth leveraging accounts receivable software like that offered by Chaser. Their intelligent solution integrates seamlessly with your accounting system to automatically sync each transaction, enabling you to reconcile your accounts faster.
Additionally, Chaser's outsourced credit control service means you can keep on top of your debtors and save valuable time and money, while improving your cash flow and customer relationships. An accounting software and dedicated company that really takes into consideration each customer and client, it's designed to make your bank reconciliations so much easier.
Watch this webinar to see the Chaser platform in action, or contact our team to find out how Chaser can support your business accounting processes. From your bank reconciliation statement to checking your cash balance and bank account balance match as they should, Chaser can help.