What Is a Bank Statement Reconciliation?

Bank reconciliation is a fundamental accounting procedure that ensures the cash balance recorded in a company’s internal financial records aligns with the balance reported by the bank. This process involves comparing transactions listed on a bank statement with corresponding entries in the entity’s cash ledger or accounting software. Its core purpose is to identify and explain any differences between these two sets of records. This routine check is performed regularly, typically monthly, to maintain precise financial data. A successful reconciliation means the adjusted cash balance in the company’s books matches the adjusted cash balance according to the bank.

Why Reconcile Bank Statements

Performing regular bank reconciliations offers several important benefits for financial management. It serves as a crucial internal control, verifying the completeness and accuracy of financial transactions. By systematically comparing records, it ensures all payments and receipts in the bank account have been properly recorded in the accounting records.

This process is instrumental in detecting errors, whether from the bank or the company’s own record-keeping. It can uncover mistakes such as duplicate entries, incorrect amounts, or missing transactions. Reconciliation also helps identify and prevent fraudulent activities, including unauthorized withdrawals or altered transactions, by flagging unusual discrepancies.

Regular reconciliation provides a reliable picture of an entity’s cash position, which is important for effective cash flow management. Understanding actual available funds helps in making informed financial decisions, avoiding overdrafts, and optimizing liquidity. This accuracy supports reliable financial reporting for internal assessment and external stakeholders.

Information Needed for Reconciliation

Before beginning the reconciliation process, gathering specific documents and financial information is necessary. The primary document required is the bank statement, typically provided monthly by the financial institution. This statement details all deposits, withdrawals, fees, and interest posted to the account during a specific period.

Alongside the bank statement, the company’s internal cash records are essential. This includes the cash ledger, checkbook register, or the cash account within an accounting software system, which tracks all cash transactions. These internal records should reflect every deposit made and every check written or electronic payment initiated.

Other supporting documents may also be needed to explain transactions that appear in one record but not the other. This includes copies of deposit slips for recent deposits, which confirm the amount and date of cash received. Any cancelled checks or transaction receipts for payments can help verify expenditures.

If previous reconciliations have been performed, the prior reconciliation statement is useful. This helps identify any outstanding items from earlier periods that may have cleared the bank in the current period, ensuring continuity.

Steps to Perform Reconciliation

The reconciliation process begins by noting the ending cash balance reported on the bank statement and the ending cash balance in the company’s internal cash records for the same period. These two figures are unlikely to match initially due to timing differences and unrecorded items. The goal is to adjust both balances until they agree.

First, compare all deposits listed in the company’s books with those appearing on the bank statement. Any deposits recorded by the company but not yet shown on the bank statement are “deposits in transit” and should be added to the bank statement balance. Conversely, any deposits on the bank statement not in the books, such as interest earned, need to be added to the company’s book balance.

Next, match all checks written and electronic withdrawals recorded in the company’s records against the cleared transactions on the bank statement. Checks issued by the company but not yet presented to the bank for payment are “outstanding checks” and must be subtracted from the bank statement balance. Similarly, bank service charges, fees, or non-sufficient funds (NSF) checks deducted by the bank, but not yet recorded by the company, require subtraction from the company’s book balance.

After identifying and adjusting for these timing differences and bank-initiated transactions, both the bank balance and the book balance should be adjusted to reflect these items. Any errors discovered, whether made by the bank or the company, also require correction in the appropriate record. The reconciliation is complete when the adjusted bank balance equals the adjusted book balance.

Common Discrepancies

Several common reasons explain why a company’s internal cash balance might not immediately match its bank statement balance. These differences typically fall into categories of timing variations or transactions recorded by one party but not yet the other.

One frequent discrepancy involves “deposits in transit.” These are funds the company has received and recorded, but the bank has not yet processed or posted to the account. For instance, a deposit made late in the day or on the last day of the month might not appear on the bank statement until the next business day.

Another common item is “outstanding checks.” These are checks that the company has written and recorded in its books, but the payee has not yet cashed or deposited them, meaning they have not yet cleared the bank.

Bank service charges or fees, such as monthly maintenance fees or transaction charges, are often deducted directly by the bank from the account. The company typically becomes aware of these charges only when reviewing the bank statement and must then record them in its own books. Conversely, interest earned on the account balance is added by the bank and needs to be recorded by the company.

Errors can occur from either side. The bank might make a mistake in processing a transaction, or the company might accidentally record an incorrect amount or duplicate an entry. Non-sufficient funds (NSF) checks, which are checks deposited by the company that later bounce, also create a discrepancy as the bank reduces the account balance, requiring the company to adjust its records.