How to Perform Bank Reconciliation Step-by-Step

Bank reconciliation ensures a business’s or individual’s internal cash records align with their bank statements. This process compares the two sets of records to identify discrepancies. Regular bank reconciliations maintain accurate financial records, supporting sound financial health. This practice also helps detect potential errors, omissions, or fraud, providing control over financial assets.

Information Needed for Reconciliation

Gathering all necessary financial documents is important for a thorough comparison. The primary document is the bank statement for the specific period, providing an official record of all transactions processed by the bank. The company’s internal cash ledger, check register, or accounting software records for the same period are essential, representing the business’s own recording of cash inflows and outflows.

Additional documents like deposit slips, check stubs, or detailed electronic transaction records are necessary. These items help in verifying transactions that might have been recorded internally but have not yet appeared on the bank statement, or vice versa. Having accurate and complete records from both the banking institution and the internal accounting system is important for a successful reconciliation. If a reconciliation was performed for the prior period, that statement can be helpful to identify any outstanding items that may have cleared in the current period.

Reconciling Bank Transactions

Bank reconciliation involves systematically comparing each transaction on the bank statement with the corresponding entry in internal accounting records. Begin by marking all matching deposits and withdrawals that appear on both the bank statement and the internal ledger. This step identifies transactions already recorded and processed by both entities. Any transaction that does not have a match requires further investigation.

Common items on the bank statement not yet in internal books include bank service charges, which banks deduct for maintaining accounts or processing transactions. These charges can range from a few dollars to tens of dollars depending on the account type and activity. Interest earned on the account balance is another common item, reflecting income credited directly by the bank, usually a small percentage of the average daily balance. Non-sufficient funds (NSF) checks, which are checks received from customers that bounce due to insufficient funds, will appear as deductions on the bank statement, often accompanied by a fee from the bank, typically between $25 and $45 per item.

Conversely, some transactions recorded in the internal books may not yet appear on the bank statement. Outstanding checks are a frequent example; these are checks issued by the business and recorded in its ledger but not yet cleared by the bank. Deposits in transit refer to cash or checks received and recorded by the business but not yet processed and credited by the bank, often occurring with deposits made near the end of a business day. After identifying all unmatched items, these discrepancies should be listed and totaled separately for both the bank statement side and the internal records side to prepare for the next step.

Adjusting the Books

After identifying all discrepancies, the next step involves making necessary adjustments to internal accounting records. The bank statement is considered accurate, so adjustments are made only to the company’s books. These adjustments are for items that affected the cash balance at the bank but were not yet recorded internally.

For instance, bank service charges and NSF check fees, which reduce the cash balance, must be recorded in the internal books. Similarly, any interest income credited by the bank must be added to the internal cash balance. Errors made during the initial recording of transactions, such as incorrect amounts or miscategorized entries, also necessitate corrective adjustments. These adjustments are typically made through journal entries within accounting software or a manual ledger, directly impacting the cash account and other relevant accounts.

After all necessary adjustments are entered into the internal records, the adjusted cash balance in the company’s books should match the adjusted bank balance from the reconciliation statement. This final match confirms that internal records accurately reflect the true cash position, aligning with the bank’s records. Completing this step ensures the integrity of financial reporting and provides a reliable basis for future financial decisions.