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

Bank reconciliation is a fundamental accounting process that ensures the cash balance in a company’s internal financial records matches the corresponding balance reported by its bank. This involves comparing the bank’s statement with the company’s own cash ledger or accounting software. The purpose is to identify and explain any differences, verifying the accuracy of financial data. Regular reconciliation helps businesses maintain a clear picture of their cash position and supports sound financial management.

Gathering Your Materials

Before beginning the reconciliation process, gather specific documents for the relevant period. Obtain your bank statement, which lists all transactions processed by the bank. This statement includes the account holder’s name, account number, period covered, beginning and ending balances, deposits, withdrawals, bank fees, and any interest earned.

Next, access your internal cash ledger, checkbook register, or accounting software records for the same period as the bank statement. This record contains your company’s cash receipts and disbursements. Focus on beginning and ending cash balances, transaction dates, check numbers, and amounts for deposits and payments. If available, retrieve the bank reconciliation statement from the previous period. This document lists outstanding items from the prior month, such as uncleared checks or deposits in transit, that should appear on the current bank statement.

Understanding Common Discrepancies

It is common for your company’s cash records to differ from the bank statement balance. These discrepancies arise from timing differences or transactions recorded by one party but not yet by the other. One frequent cause is “deposits in transit,” which are cash receipts your company has recorded but the bank has not yet processed. For instance, a deposit made late on the last day of the month might appear in your books for that month but on the bank statement for the first day of the next month.

Similarly, “outstanding checks” are checks your company has written and recorded as payments but have not yet cleared the bank. The bank’s statement will not show these checks until the payee deposits them and the bank processes the transaction. Another common discrepancy involves bank service charges or fees, such as monthly maintenance fees, which the bank deducts directly from your account. These amounts often appear on the bank statement before your company has recorded them.

Conversely, “interest earned” on your bank account balance is added by the bank and appears on the statement before your company’s records reflect it. Non-Sufficient Funds (NSF) checks, also known as “bounced checks,” are checks your company deposited but were returned by the payer’s bank due to insufficient funds. The bank will deduct the NSF check amount, and often an additional fee, from your account, which you may not have immediately recorded. Finally, errors can occur on either side, requiring investigation and correction.

Performing the Reconciliation

With all necessary documents prepared, the reconciliation process involves comparing and adjusting both the bank’s reported balance and your company’s internal cash balance until they match. Begin with the ending cash balance as reported on your bank statement. To this bank balance, add any deposits in transit, which are deposits your company recorded but the bank has not yet credited.

Next, subtract all outstanding checks from the bank balance. These are checks your company issued and recorded but have not yet been cashed by the recipients. After accounting for these timing differences, compare all other cleared checks and deposits listed on the bank statement with your internal records, marking off matching items. This step helps identify any transactions that appear on one record but not the other.

Shift your focus to your company’s internal cash ledger balance, often referred to as the book balance. To this balance, add any items that increase your cash but were not yet recorded internally, such as interest earned or amounts collected by the bank directly on your behalf. Conversely, subtract any items that decrease your cash, like bank service charges or Non-Sufficient Funds (NSF) checks the bank has deducted. Finally, adjust for any errors discovered in your company’s own records, whether incorrect amounts, duplicate entries, or omitted transactions. After making these adjustments to both the bank and book balances, the two adjusted figures should be identical.

Recording Adjustments and Next Steps

Once the bank reconciliation is complete and the adjusted bank balance matches the adjusted book balance, the next step involves updating your company’s financial records. For any items identified and adjusted on the company’s book side, such as bank service charges, interest earned, or NSF checks, corresponding journal entries must be made in your accounting system.

Promptly investigate and correct any errors discovered during the reconciliation process. If an error originated with the bank, such as an incorrect deposit amount or a transaction belonging to another customer, contact the bank immediately for correction. For errors found in your company’s internal records, make the necessary correcting entries to ensure accuracy. This could involve adjusting a recorded transaction amount or adding an omitted entry.

Maintaining accurate financial records requires consistent practice. File the completed bank reconciliation statement along with the supporting bank statement and internal records. This documentation serves as an audit trail and provides evidence of the reconciliation process. Performing bank reconciliations regularly, typically monthly, acts as an important internal control, helping to detect fraud, identify accounting errors, and ensure the reliability of your company’s reported cash balance.