What Is Reconciling Your Bank Statement?

Financial record-keeping is essential for individuals and businesses to understand their economic position. Bank reconciliation is a foundational process that ensures the accuracy of financial records. It provides a reliable basis for making informed decisions about personal or business finances.

What is Bank Reconciliation?

Bank reconciliation is the systematic process of comparing financial transactions recorded in your internal records with those on your bank statement. The objective is to identify and explain any differences between the two sets of records. This comparison helps verify that all transactions are accurately reflected in both your books and the bank’s records. Ultimately, it ensures your internal accounting balance aligns with the balance reported by your financial institution.

Purpose of Bank Reconciliation

Bank reconciliation serves several purposes. It confirms the accuracy of your financial records by identifying discrepancies between your internal accounting and the bank’s statement. This process helps detect errors made by either the bank or the account holder, such as incorrect transaction amounts. Regularly reconciling also safeguards against unauthorized transactions or potential fraud by allowing early identification of suspicious activity. This practice provides a reliable picture of available cash, which aids effective cash flow management and financial planning.

How to Reconcile Your Bank Statement

Reconciling your bank statement involves a methodical process to align your internal financial records with your bank’s records. Begin by gathering your most recent bank statement and your internal financial ledger. Compare each transaction on your bank statement, including deposits and withdrawals, with your own records. Mark off each item that matches in both sets of records.

Next, identify any outstanding items—transactions recorded in one place but not yet reflected in the other. For instance, checks you have written but the bank has not yet processed are outstanding. Similarly, deposits you have made that have not yet appeared on your bank statement are deposits in transit. These timing differences must be accounted for.

After identifying outstanding items, adjust your internal balance for transactions appearing on the bank statement but not yet in your ledger. This includes bank service charges, monthly maintenance fees, or interest earned. If you discover errors, such as an incorrect amount or a duplicated transaction, correct them in your internal records. The final step is to ensure that, after all adjustments for timing differences and errors, your adjusted internal balance precisely matches the adjusted balance reported by the bank.

Common Discrepancies and Their Resolution

Discrepancies between your bank statement and internal records are common, often stemming from timing differences or errors. One frequent cause is outstanding checks, which are checks you have issued but the recipient has not yet deposited or the bank has not yet processed. These amounts are subtracted from the bank’s ending balance in your reconciliation. Conversely, deposits in transit occur when you have recorded a deposit, but the bank has not yet processed it. These deposits are added to the bank’s ending balance during reconciliation.

Bank service charges, such as monthly fees or ATM fees, are often debited by the bank without prior notification, appearing first on your statement. These amounts are subtracted from your internal record balance. Similarly, interest income earned on your account will appear on the bank statement and should be added to your internal records. Bank errors, where the bank might incorrectly debit or credit an amount, require contacting the bank for correction. User errors, such as transposing numbers or forgetting to record a transaction, require careful review of your records to rectify the mistake.