How to Do a Bank Reconciliation: A Step-by-Step Process

Bank reconciliation is a crucial step for businesses and individuals to maintain accurate financial records. It involves comparing internal cash records with external bank statements to ensure all transactions are properly accounted for. This regular comparison helps identify and resolve discrepancies, safeguarding financial data integrity. It supports sound financial control and ensures the reported cash balance accurately reflects available funds.

Understanding Bank Reconciliation

Bank reconciliation is the process of comparing the cash balance recorded in a company’s or individual’s internal accounting ledger with the balance reported on the bank statement. The objective is to identify and explain any differences between these two independent records of cash activity. This reconciliation ensures that both internal and bank records align, providing a precise understanding of the true cash position.

Regular bank reconciliations offer substantial benefits. This practice helps detect errors made by the bank or record-keeper, such as incorrect transaction amounts or omissions. It also serves as a deterrent for fraudulent activities, as unauthorized transactions stand out during comparison. Maintaining accurate cash balances is essential for effective financial planning and decision-making. Bookkeepers, accountants, or individuals for personal accounts typically undertake this financial control.

Gathering Your Financial Records

Before reconciliation, assemble all necessary financial documents. The bank statement for the period is the primary external record. This statement details all deposits, withdrawals, charges, and interest applied to the account by the financial institution. Reviewing this document provides the bank’s perspective of transactions.

The company’s internal record of cash transactions (cash ledger, cash book, or check register) is equally important. This document contains all cash inflows and outflows as recorded by the entity. The prior period’s bank reconciliation statement is also beneficial, as it lists outstanding items from the previous month that might have cleared in the current period. This ensures continuity and helps track previously identified discrepancies.

Additional supporting documents are essential. Deposit slips or receipts confirm cash or check deposits. Canceled checks or images of cleared checks are necessary for verifying payments and withdrawals. Organizing these documents by date and type before starting simplifies the process and helps locate information.

Identifying Differences

The core of bank reconciliation involves comparing each transaction on the bank statement with corresponding entries in the company’s internal cash records. As each matching item is found, mark it off on both the bank statement and the company’s ledger. This methodical approach helps isolate transactions that appear in one record but not the other, which are primary sources of discrepancies.

Several types of unmatched items commonly arise from the bank’s perspective:
Bank service charges: These are often debited directly by the bank and may not yet be recorded in the company’s books.
Interest earned: Credited by the bank, this might not be known to the company until the statement arrives.
Non-Sufficient Funds (NSF) checks: Occur when a customer’s check deposited by the company is returned due to insufficient funds.
Electronic fund transfers (EFTs) or direct debits/credits: Initiated by third parties (e.g., automatic utility payments or customer direct deposits), these may appear on the bank statement before the company has recorded them.
Bank errors: These can include incorrect deposits or withdrawals made by the bank itself.

Conversely, some items in the company’s records may not yet appear on the bank statement. Outstanding checks are those written and recorded by the company but not yet cleared by the bank. Deposits in transit are cash or checks the company has recorded and deposited, but which the bank has not yet processed by the statement date. For instance, a deposit made late on the last day of the month might not appear until the next business day. Company errors, such as recording an incorrect amount or duplicating an entry, also create discrepancies.

Adjusting Your Company Records

After identifying all differences between the bank statement and internal records, adjust the company’s cash balance to reflect the true financial position. Distinguish between items requiring formal journal entries in the company’s accounting system and those that simply affect the reconciliation statement. Only items the company was unaware of or incorrectly recorded need adjustment in the general ledger.

Items requiring journal entries include transactions the bank processed but the company had not yet recorded:
Bank service charges: These reduce the cash balance and require a debit to Bank Charges Expense and a credit to Cash.
Interest earned: This increases cash and necessitates a debit to Cash and a credit to Interest Revenue.
NSF checks: Received from customers, these reduce the company’s cash and are recorded by debiting Accounts Receivable (to re-establish the claim against the customer) and crediting Cash, along with any associated bank fees.
Electronic fund transfers: An automated utility bill payment, for example, would be recorded by debiting the relevant expense account (e.g., Utilities Expense) and crediting Cash.
Company errors: Identified errors, such as recording an incorrect payment amount, require a correcting journal entry to adjust the Cash account and the corresponding expense or asset account.

Conversely, certain items identified during reconciliation do not require journal entries because the company has already correctly recorded them, but the bank has not yet processed them. Outstanding checks, issued by the company but not yet cashed by the payee, are listed as deductions from the bank balance on the reconciliation statement. Deposits in transit, made by the company but not yet credited by the bank, are added to the bank balance. Bank errors, such as an incorrectly posted deposit, should be reported to the bank for correction and noted on the reconciliation statement but do not prompt a journal entry. The goal of these adjustments is to bring the company’s internal cash balance into agreement with the adjusted bank balance, reflecting an accurate picture of available funds.

Completing the Reconciliation

The final step involves verifying that the adjusted bank balance matches the adjusted company book balance. If, after all discrepancies and adjustments, the balances do not agree, re-examine calculations and individual transactions. This often involves re-ticking off items and carefully reviewing the arithmetic to locate any overlooked errors.

Once balances agree, the reconciliation is complete and should be formally documented. This documentation typically involves dating the statement and having the preparer sign it. Attaching supporting documents, such as the bank statement, copies of journal entries, and notes on outstanding items, is standard practice. Bank reconciliations are performed monthly, often shortly after the bank statement becomes available, to ensure continuous accuracy of cash records and timely detection of issues.