What Is Bank Reconciliation and How Do You Perform One?
Understand bank reconciliation to perfectly align your financial records with your bank statements. Discover how to perform it, its benefits, and fix any variances.
Financial record-keeping is an important practice for individuals and businesses. It involves comparing two independent sets of financial records to ensure they align and accurately reflect all transactions. This process helps verify the precision of financial data, which is essential for sound money management.
Understanding Bank Reconciliation
The process of bringing a bank statement into agreement with an internal ledger, such as a checkbook register, is known as bank reconciliation. Its primary goal is to ensure that the balance recorded in your personal or business records precisely matches the balance reported by the bank. This involves accounting for all transactions that have occurred but may not yet appear on both records. Common items that frequently cause these differences include checks that have been written but not yet cashed, known as outstanding checks, and deposits that have been made but not yet processed by the bank, referred to as deposits in transit.
Performing Bank Reconciliation
To begin the reconciliation process, gather your bank statement, your checkbook register or other internal accounting ledger, and any unrecorded deposit slips or check stubs. Having these documents readily available ensures you have all necessary information for a thorough comparison.
Next, compare all deposits listed on your bank statement with those recorded in your register. Mark off each matching item in both records to track what has cleared. Any deposits noted in your register that do not appear on the bank statement are considered deposits in transit and should be added to the bank’s balance.
After deposits, compare all withdrawals, including checks, debit card transactions, and electronic transfers, from your bank statement against your register. As with deposits, mark off matching items. Checks or other withdrawals recorded in your register but not yet shown on the bank statement are outstanding checks and should be subtracted from the bank’s balance.
Account for any bank-initiated items that appear on your statement but are not yet in your internal records. This includes bank service fees and any interest earned on your account. These items need to be added or subtracted from your register’s balance to reflect the bank’s adjustments.
Finally, calculate the adjusted balances for both your bank statement and your register. Add deposits in transit to the bank statement balance and subtract outstanding checks. For your register, add any interest earned and subtract bank fees or other charges. If these adjusted balances now match, your reconciliation is complete, providing a verified accurate cash position.
Importance of Reconciliation
Performing regular bank reconciliations helps individuals and businesses maintain accurate financial oversight. This practice aids in detecting unauthorized transactions or errors, such as duplicate entries or transposed numbers, and verifies the accuracy of internal financial records, ensuring the books reflect the actual cash position.
Regular reconciliation offers a true picture of available funds for effective cash flow management and informed financial decisions. It allows for the timely correction of mistakes made by either the bank or the account holder, preventing minor issues from escalating. Maintaining accurate financial data through consistent reconciliation also simplifies tax preparation, ensuring income and expense reporting is based on verified information.
Addressing Variances
After performing the reconciliation steps, if the adjusted balances still do not match, it indicates a variance that requires further investigation. Common variances include outstanding checks, deposits in transit, bank errors, or unrecorded transactions like bank fees or earned interest. These differences are often due to timing discrepancies or errors in recording.
To investigate, double-check all calculations made during the reconciliation process and carefully review every entry in both your bank statement and internal ledger for transposed numbers or missing entries. For items like bank fees or interest, update your checkbook register or internal ledger to accurately reflect these amounts. If, after thorough review, discrepancies persist and appear to be bank errors or unrecognized transactions, contact your bank promptly, as there may be a limited timeframe to report errors.