How to Reconcile a Business Bank Account

Bank reconciliation is a fundamental accounting process comparing a business’s internal cash records with its bank statement. This comparison helps to identify and explain any differences between the two balances, providing a true picture of available cash. The process is important for maintaining financial control, detecting errors or unauthorized transactions, and making informed decisions about cash flow. Regularly performing bank reconciliations verifies the integrity of financial data, supporting overall financial health.

Preparing for Reconciliation

Before beginning reconciliation, gather all necessary documents and information. The primary documents required are the business’s bank statement for a specific period, typically a month, and the company’s internal cash records, such as a cash ledger, check register, or accounting software’s cash account.

Ensure the reconciliation covers the correct period, usually aligning with the bank statement’s monthly cycle. An initial check involves verifying that the opening balance on the current bank statement matches the closing balance from the previous month’s reconciliation. This step helps confirm continuity and identifies any discrepancies from prior periods.

Additionally, all transactions for the period, including deposits, checks, and electronic transfers, should be recorded in both the bank statement and the company’s records. This preliminary review helps confirm no transactions are missing before the detailed comparison begins.

Reconciling Bank and Book Balances

The core of bank reconciliation involves systematically identifying differences between the bank’s reported balance and the company’s internal cash balance. This process begins by comparing transactions line-by-line from both the bank statement and the company’s cash records, such as cleared checks and deposits. The goal is to pinpoint items that appear in one record but not the other, or items with differing amounts.

Common discrepancies often arise due to timing differences or errors. Deposits in transit are funds the company has received and recorded, but the bank has not yet processed or reflected them on the statement, often due to deposits made late in the day or just before a weekend or holiday. Similarly, outstanding checks are checks issued and recorded by the company but have not yet been presented for payment or cleared by the bank. These checks remain a liability for the payor until cashed.

Other common items affecting the reconciliation include bank service charges or fees, which are expenses deducted directly by the bank for services like account maintenance, transaction processing, or overdrafts, and may not yet be recorded in the company’s books. Conversely, interest earned on the bank account is credited by the bank but might not be recorded by the company until the statement is received. Non-Sufficient Funds (NSF) checks, also known as “bounced” checks, occur when a deposited check is returned due to insufficient funds. The company likely recorded the deposit but needs to reverse it.

Discrepancies can also stem from errors made by either the bank or the company, such as incorrect amounts, duplicate entries, or transactions posted to the wrong account. After identifying these unmatched items, they are categorized for either the bank side or the book side of the reconciliation.

Completing the Reconciliation and Adjusting Records

After identifying and categorizing the discrepancies, the next step involves calculating the “adjusted cash balance” for both the bank and the company’s books. For the bank statement balance, deposits in transit are added, and outstanding checks are subtracted. If any bank errors are identified, these are also corrected on the bank side of the reconciliation.

For the company’s book balance, adjustments are made for items the company was unaware of until receiving the bank statement. Bank service charges and NSF checks are subtracted from the book balance because these reduce the cash available. Interest earned on the account is added to the book balance. Any errors made by the company, such as recording a transaction for an incorrect amount, are also corrected in the company’s records.

The objective is for the adjusted bank balance to equal the adjusted book balance. Items that affect the company’s books require adjusting journal entries to ensure internal records reflect the actual cash position. For example, bank service charges, interest earned, and Non-Sufficient Funds (NSF) checks all necessitate specific accounting adjustments to the company’s records. Bank errors, however, are not adjusted in the company’s books; instead, the bank should be contacted to correct its error. These adjustments are important for accurate financial reporting, providing a reliable cash balance for financial statements and operational decisions.