A Comprehensive Guide to Bank Reconciliation

Consistently checking your books against bank statements is crucial in ensuring complete bookkeeping accuracy. If you don’t compare your records to the bank’s, you might miss discrepancies, unusual activity, and fraud. This article takes you into a deep dive into bank reconciliation, helping you apply the process for your business’ success.

What is Bank Reconciliation?

Mismatches in bank statements and cash book balances are normal and common, even if your bookkeeper records your transactions faultlessly. Automated banking transactions, such as bounced cheques, bank fees, and interest earned on deposit accounts, are easy for bookkeepers to overlook, especially since banks are not obligated to notify you. Outstanding cheques and deposits in transit also cause discrepancies when the bank processes them later than you record them in your books.

Bank reconciliation is the remedy to these discrepancies in records. The process compares your bank statements with your cash book to ensure that your records are accurate and up-to-date.

The Importance of Bank Reconciliation

Bank reconciliation lets you compare your records with those of a heavily-regulated institution. Engaging in the process regularly yields multiple business benefits.

Ensures Financial Accuracy

A consistent and organized bank reconciliation practice helps you spot accounting errors early, ensuring that your financial reports are accurate and up-to-date. It also helps you calculate your true cash balance. The accuracy allows you to make informed decisions about budgeting, cash flow forecasting, and other major business decisions.

Prevents Losses

Bank reconciliation makes spotting unusual, unauthorized, or fraudulent transactions easy. If you conduct bank reconciliation regularly, you can take action before suspicious activity creates more problems.

Ensures Compliance

Submitting inaccurate records to government bodies might lead to penalties and legal issues. Keeping your records accurate through bank reconciliation helps you maintain compliance with accounting standards and regulations.

What Causes Misalignment in Cash Books and Bank Statements?

There are multiple reasons for cash book and bank statement misalignment. To help you spot errors faster, we’ve named the most common instances below.

Omissions

Omissions refer to the transactions reflected on the bank statement that your cash book failed to record. Examples include:

• Interest received: Banks don’t always notify you when they pay interest on your deposit account. Because payouts are typically automated and amounts are minimal, bookkeepers often forget to record the transaction.
• Bank fees: Bank fees not attached to any type of transaction (such as a withdrawal or transfer) are easy to overlook, especially if they are automatically drawn from your account. Examples include non-sufficient funds fees, overdraft fees, minimum balance fees, and late payment fees.
• Bounced cheques: Cheques will bounce if your account lacks the funds to cover them. Because not all banks notify you of bounced cheques, you might make the mistake of recording the amount on your ledger despite the invalidity of the transaction.

Timing Differences

Sometimes, banks will record a transaction for a different period than it appears in your cash book. This discrepancy causes the transaction to appear in one document but not in the other. Examples of these instances include:

• Deposits in transit: A deposit in transit refers to money that your company has received and recorded in your books but does not appear on the bank statement for the same period.
• Outstanding cheque: An outstanding cheque is a cheque the company issued to a recipient but has not yet been processed by the bank. If the company recorded the paid amount on their books, it creates a discrepancy with the bank statement.

Errors

Sometimes, bookkeepers commit errors in recording transactions. Bank reconciliation helps you correct these mistakes to prevent further issues.

Banks can also commit errors in processing bank statements. However, because the process is mostly automated, errors in bank statements are less common than errors in cash books.

The 5 Steps of Bank Reconciliation

Now that you understand bank reconciliation and why it matters, let’s go over the different steps. While it is possible to streamline the process by using bookkeeping software or outsourcing bookkeeping services, it still helps to understand the principles behind each step.

1. Decide on a Period to Compare

The first step in bank reconciliation is deciding on a specific timeframe to track and compare. This depends on how frequently you perform bank reconciliations. If you perform bank reconciliations monthly, you should refer to your past month’s bank statement and cash book.

2. Gather All Relevant Business Documents

Once you’ve decided on a period to reconcile, gather all relevant accounting documents. The most important document to prepare is your cash book. This is the record of transactions you will compare to your bank statement.

It is also helpful to have additional accounting documents on hand. These include:

• Receipts
• Sales and purchase invoices
• Cheques
• Deposit slips

Having these documents allows you to confirm the validity of records on your cash book. Reviewing them might also help you catch missing cash book entries.

3. Request A Bank Statement

The next step is getting a bank statement for your selected accounting period. Traditionally, banks automatically send their customers their monthly bank statements. However, if you’ve opted out of paper statements or want to request a statement for a more specific period, you can request a PDF copy of your bank statement via online banking.

4. Compare Documents

It’s time to compare your bank statement to your cash book. Again, make sure both documents cover the same accounting period.

The first step is to tick off all matching transactions. Next, locate any data entry errors, such as missing transactions or typos. Note that you are more likely to find errors in your cash book than in your bank statement. Once these errors have been identified, make all necessary corrections.

Finally, correct your ending balances by following the rules below.

Correcting your bank statement balance:

1. Locate any deposits in transit or outstanding cheques.
2. Add all deposits in transit to your bank statement balance.
3. Deduct all outstanding cheques from your bank statement balance.

Correcting your cash book balance:

1. Check if you earned interest.
2. Check if the bank charged any service fees.
3. Add interest payouts to your cash book balance.
4. Deduct any banking service fees.

Once your balances have been corrected, check if they are equal. The matched balance is now your true cash balance.

5. Record the Reconciliation

You’re not done with the reconciliation process until you record the corrections on official documents. There are two ways to do this.

• Add a cash book note: Attach a note at the end of your cash book to track any balance changes revealed by bank reconciliation. This practice is efficient but lacking in detail, so if you prefer for your books to reveal the full picture, choose a different method.
• Create a bank reconciliation statement: A bank reconciliation statement is an official document that reports all balance adjustments, additions, and deductions made on your bank statement and cash book.

Bank Reconciliation Example

To illustrate the process of comparing cash books and bank statements, we’ve provided an example below.

You run a small creative agency with the help of a contractor that you pay twice a month. Last January, you made the following transactions:

• January 1: You started with $3,000 in your business bank account.
• January 2: You paid $500 in rent.
• January 10: A client paid you $1,500.
• January 14: You paid your contractor $1,000.
• January 17: A client paid you $2,000.
• January 29: You paid your contractor $1,000.
• January 30: You paid $50 for electricity.
• January 31: A client paid you $1,000.
• January 31: You close the month with a balance of $4,950.

Comparing Balances

Below, we show how these transactions would reflect on your cash book. Next, we show how a bank statement would reflect the same accounting period.

Cash Book

Date	Description	Received	Date	Description	Paid
Jan. 01	Balance b/d	$3,000	Jan. 02	Rent	$500
Jan. 10	Sales	$1,500	Jan. 14	Contractor Charge	$1,000
Jan. 17	Sales	$2,000	Jan. 29	Contractor Charge	$1,000
Jan. 31	Sales	$1,000	Jan. 30	Electricity	$50
			Jan. 31	Balance c/d	$4,950
		$7,500			$7,500
Feb. 01	Balance b/d	$4,950

Bank Statement

Date	Description	Paid in	Paid out	Balance
Jan. 01	Balance	–	–	$3,000
Jan. 02	Payment – Rent		$500	$2,500
Jan. 10	Payment Received	$1,500		$4,000
Jan. 14	Transfer		$1,000	$3,000
Jan. 17	Payment Received	$2,000		$5,000
Jan. 29	Transfer		$1,000	$4,000
Jan. 30	Payment – Electricity		$50	$3,950
Jan. 31	Interest	$5		$3,955
Jan. 31	Service Fee		$15	$3,940
	Ending Balance			$3,940

We can see that the ending balances are different. This can be attributed to the following reasons:

• The bank statement failed to account for the $1,000 customer payment on January 31. This means that the deposit is in transit.
• Your cash book does not reflect the interest payment of $5.
• The bank charged you a service fee of $15.

Now, it’s time to correct the balances.

Bank Balance:

• Add $1,000 to your bank balance.
• You end with a balance of $4,940.

Cash Book Balance:

• Add $5 to your cash book balance.
• Subtract $15 from your cash book balance.
• You end with a balance of $4,940.

Both balances are now equal, revealing your true cash balance. Now, it’s time to record the reconciliation by adjusting journal entries. Since cash book notes need little explanation, we’ll prepare a bank reconciliation statement.

Creating A Bank Reconciliation Statement

Example Company — Bank Reconciliation Statement

Cash balance as per bank statement, January 31, 2024	$3,940
Add: Deposit in transit	$1,000
Adjusted Cash Balance	$4,940
Balance as per depositor’s record, January 31, 2024	$4,950
Add: Interest earned	$5
Deduct: Service fee	$15
Adjusted cash balance	$4,940

To create a bank reconciliation statement, follow the steps below:

1. Start with a line for the unadjusted bank statement ending balance.
2. Add one line per addition or deduction below.
3. Add a line for the adjusted bank statement cash balance.
4. Create a new line for the unadjusted cash book balance.
5. Add one line per addition or deduction below.
6. Add a line for the adjusted cash book balance.

Bank Reconciliation Best Practices

Bank reconciliation, while helpful, is often time-consuming. Follow the practices below for increased efficiency.

Conduct Bank Reconciliation Regularly

Perform bank reconciliation regularly to ensure that your records are consistently accurate. A rule of thumb is to match the frequency of reconciliation with transaction volume.

• Freelancers and sole proprietors with minimal transactions in a year can perform bank reconciliation every quarter.
• The average small business should perform bank reconciliation at least once a month.
• Large businesses with a high volume of transactions should perform bank reconciliation weekly or even daily.

The reconciliation process becomes more complex as transaction volume increases. By reconciling more frequently, you can keep the process manageable and address fewer discrepancies at a time.

Store and Organize Accounting Documents

Bank statements and cash books are not the only documents involved in bank reconciliation. Other accounting documents, such as checks, receipts, and invoices, help build a more complete picture of your transaction history. They also provide an official source against which to compare your records.

As you make financial transactions, have a system for storing and organizing official accounting documents. Automated expense tracking tools can help you match receipts to bookkeeping records for easier location. It also helps to establish organized digital or physical folders for document storage.

Use a Bank Reconciliation Statement Template

There are many bank reconciliation statement templates available online. You can use these to save time you would have otherwise used to create a template from scratch. Templates also help you keep your documents uniform, which makes them easier for bookkeepers and other relevant staff to understand.

It’s best to use Excel or Google Sheet templates. Templates online typically come with built-in formulas that calculate balances for you. Even if no formulas are available, your spreadsheet tool will allow you to encode some yourself. It saves you the time and effort of manual arithmetic.

Leverage Bookkeeping Software

The best bookkeeping software can streamline both expense tracking and bank reconciliation. Most bookkeeping tools sync with your bank accounts, allowing you to transfer your banking feeds directly to your books. The best tools automatically update your books in real time, adding even the transactions you miss, such as bounced cheques, interest payments, and bank fees.

If your software does not offer syncing capabilities, it will likely allow you to import your banking history directly onto your books. While you would need to update your books yourself, the tools still automate the process of data entry, eliminating the risk of human error.

Some software also offers bank reconciliation features. These digital tools make identifying discrepancies and ticking off matching transactions easy. Some also let you generate useful reports, such as reconciliation discrepancy reports, missing check reports, and transaction detail reports.

Summary

Bank reconciliation is an essential part of bookkeeping. Bank statements provide a source of truth to compare your bookkeeping records against, ensuring greater accuracy in your financial reports. With your books up-to-date, you can make smarter financial decisions on behalf of your business.

Simplify Bank Reconciliation with EpicBooks

Regular bank reconciliation is key to keeping accurate books. However, the process can take time away from higher-impact business activities. Lighten your financial management load by outsourcing your bookkeeping to EpicBooks. Our professionals provide premier bank reconciliation, bookkeeping, tax preparation, financial analysis, and more. Check out our services page for more details.

Frequently Asked Questions

How do you know that a bank reconciliation was correctly done?

You will know that you successfully reconciled your accounts when your cash book balance and bank statement balance are equal. For increased accuracy, check your cash book entries against official accounting documents, such as receipts, invoices, cheques, and deposit slips. This allows you to fill in missing transactions or check whether all transactions actually occurred.

Who is responsible for bank reconciliation?

If your company does not have a bookkeeper, the owner is in charge of bank reconciliation. Otherwise, the responsibility falls to an accountant or bookkeeper. It’s best practice to outsource bookkeeping services so that you, as the owner, have more time to focus on running your business. Bookkeepers also have more experience conducting bank reconciliations and are thus less likely to commit errors.

What is the ideal timeline for conducting bank reconciliations?

How often you conduct bank reconciliations depends on your transaction volume. The higher your transaction volume, the more frequently you should perform bank reconciliations. Having fewer transactions to address due to frequent bank reconciliations keeps the process manageable. Typically, the average small business conducts bank reconciliations once a month.

What is the purpose of a bank reconciliation statement?

The bank reconciliation statement is the official document showing your updated balances. It helps bookkeepers note recording discrepancies between bank statements and cash books over a selected period.