How to Complete a Bank Reconciliation

Bank reconciliation is a fundamental accounting process that confirms the cash balance in a business’s internal records aligns with the cash balance reported by its bank. This practice helps ensure the accuracy of financial statements, detect errors, identify unauthorized transactions, and maintain precise financial reporting. Businesses rely on accurate cash balances for effective budgeting, operational planning, and making informed financial decisions.

Gathering Your Reconciliation Information

Gathering all necessary financial documents is an important first step. The most recent bank statement provides a comprehensive summary of all transactions processed by the bank for a specific period, typically a month. This statement lists the beginning balance, all deposits, withdrawals, electronic transfers, bank fees, and any interest earned, culminating in an ending balance.

You will also need your company’s internal cash records, which detail all cash inflows and outflows. These records might include a check register, a cash receipts journal, or the general ledger cash account, which provides a running balance of all cash transactions.

Having the previous month’s bank reconciliation statement is also beneficial. This document helps identify any items that were outstanding from the prior period, such as checks issued but not yet cleared by the bank, which would carry forward to the current reconciliation. Ensuring all these documents are complete and readily available before starting simplifies the entire process.

Identifying Common Discrepancies

Differences between a company’s cash records and its bank statement are common and arise from various timing or recording issues. Deposits in transit represent cash receipts that the company has recorded in its books but the bank has not yet processed, often because the deposit was made late in the day or after banking hours.

Outstanding checks are checks the company has issued and recorded as payments, but the recipient has not yet presented them to the bank. Bank service charges are fees deducted directly by the bank for services like account maintenance, wire transfers, or insufficient funds. These typically appear on the bank statement but may not be recorded in the company’s books until the statement is received.

Interest earned is income paid by the bank on the account balance, which increases the bank’s reported balance. This interest may not be recorded by the company until the bank statement is reviewed. Non-Sufficient Funds (NSF) checks occur when a check deposited by the company bounces due to insufficient funds in the payer’s account. The bank deducts the amount of the check from the company’s account and may impose a charge, which the company must then record.

Errors can also cause discrepancies, originating from either the bank or the company. A bank error might involve incorrectly crediting another customer’s deposit to your account, or incorrectly debiting your account. Conversely, a company error could be recording a check for the wrong amount or failing to record a cash receipt. Identifying the source of each discrepancy is fundamental to correcting the cash balance.

Performing the Reconciliation Steps

The reconciliation process begins by noting the cash balance reported on your bank statement and the cash balance shown in your company’s general ledger. The goal is to adjust both figures until they match, arriving at an accurate reconciled cash balance.

To reconcile the bank balance, add any deposits in transit. These are funds you have recorded as received but the bank has not yet processed, increasing the bank’s effective cash balance. Then, subtract any outstanding checks, which are payments you have made but the bank has not yet cleared, thus decreasing the bank’s effective cash balance. If any bank errors are identified, such as an incorrect debit or credit, add or subtract the amount to correct the bank’s reported balance. After these adjustments, calculate the “adjusted bank balance.”

Next, reconcile the book balance, starting with the cash balance from your company’s records. Add any interest earned that the bank has paid but you have not yet recorded, increasing your book balance. Subtract bank service charges, which are fees the bank has deducted but you have not yet accounted for. Subtract any NSF checks that have bounced, as the bank has removed these funds from your account.

If company errors are discovered, such as a check recorded for an incorrect amount or a missed deposit entry, add or subtract the necessary amount to correct your internal records. After applying these adjustments, calculate the “adjusted book balance.” The final step involves comparing the “adjusted bank balance” with the “adjusted book balance.” If these two amounts are equal, the reconciliation is complete.

Finalizing the Reconciliation

Once the adjusted bank balance matches the adjusted book balance, follow-up actions are necessary. Any adjustments made to the company’s book balance require corresponding journal entries. For instance, recording bank service charges necessitates a debit to an expense account and a credit to the cash account, reducing the cash balance in your books. Recording interest earned would involve a debit to cash and a credit to an interest income account.

Adjustments for NSF checks require a debit to Accounts Receivable and a credit to cash, reflecting that the funds were not truly received. Correcting company errors also involves specific journal entries to ensure the cash account accurately reflects the true cash position. These entries are crucial because they update the company’s general ledger, ensuring its financial statements present the actual cash balance.

It is important to maintain thorough documentation of the completed reconciliation statement along with all supporting documents, such as the bank statement and copies of checks. This practice provides a clear audit trail for future reference and internal control purposes. Should any bank errors have been identified during the process, contacting the bank promptly to request a correction is also a necessary action to ensure their records accurately reflect your account.