What Is the First Step in Preparing a Bank Reconciliation?

A bank reconciliation matches the balance of cash in a company’s accounting records to the corresponding balance on its bank statement. It identifies any differences between the two balances, ensuring the accuracy of financial records and providing a clear picture of available cash. Performing regular bank reconciliations is a fundamental internal control measure, helping to detect errors, prevent fraud, and ensure that all cash transactions are properly accounted for.

Gathering Essential Documents

The first step in preparing a bank reconciliation involves assembling all necessary financial documents. This includes the most recent bank statement, which details all cash inflows and outflows processed through the bank account during a specific period. This statement lists deposits, checks cleared, electronic fund transfers, bank service charges, and any interest earned, along with the ending balance.

Alongside the bank statement, you will need the company’s internal cash book or the general ledger cash account. This internal record tracks all cash receipts and disbursements made by the business. It contains details like transaction dates, amounts, descriptions, and often includes check numbers for payments made. Having a previously completed bank reconciliation statement is beneficial, as it helps identify outstanding items from the prior period that may have cleared in the current month.

The Initial Comparison Process

Once all relevant documents are gathered, the initial comparison process can begin. This involves systematically comparing the individual transactions recorded in the bank statement against those documented in the company’s cash book or general ledger. Begin by confirming that the opening balance on the current bank statement matches the ending balance from the previous bank reconciliation and the opening balance in the cash book. This ensures a proper starting point for the current period.

This step involves “ticking off” or marking each transaction that appears in both records. For instance, each deposit listed on the bank statement should be located and marked in the cash book, verifying that the date, amount, and description align. Similarly, every check or electronic payment recorded in the cash book should be matched against the cleared transactions on the bank statement, confirming the check number, amount, and date. This systematic cross-referencing helps identify transactions that have been recorded in one place but not yet in the other.

Identifying and Investigating Discrepancies

Following the initial comparison, the next step is to identify and investigate any transactions that did not match between the bank statement and the cash records. These unmatched items represent discrepancies that need to be understood and explained. Common discrepancies include “deposits in transit,” which are cash receipts recorded by the company but not yet processed and posted by the bank, often due to timing differences like deposits made late in the day.

Another frequent discrepancy is “outstanding checks,” which are checks written and recorded by the company but have not yet been presented to or cleared by the bank. Bank service charges, such as monthly maintenance fees or wire transfer fees, are often debited directly by the bank and may not be recorded in the company’s books until the statement is received. Similarly, interest earned on the account or direct debits for recurring payments might appear on the bank statement before the company has recorded them internally. Each identified discrepancy requires investigation to determine its nature, verifying the amount and ensuring it is legitimate. All discrepancies found should be thoroughly documented, noting the type of item, its amount, and the reason for the difference.