What is bank reconciliation? Definition, examples, and process

todayMay 7, 2021

share close

If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. The balance recorded in your books (again, the cash account) and the balance in your bank account will rarely ever be exactly the same, even if you keep meticulous books. Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix. The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable.

To successfully complete your bank reconciliation, you’ll need your bank statements for the current and previous months as well as your company ledger. An online template can help guide you, but a simple spreadsheet is just as effective. Bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank.

Step 4: Adjusting the Cash Account Balance

When you’re done, you’ll see a difference of zero, meaning the accounts match. If you don’t see a balance of zero, QuickBooks helps you troubleshoot the errors and reconcile your accounts. Neglecting to reconcile your bank accounts can lead to various problems down the line. You may miss errors or fraudulent activities on your statements, resulting in incorrect balances or even financial losses.

  • And don’t forget that if you’d rather not handle bank reconciliation by hand, accounting software—including free accounting software options—should minimize some of the hassle.
  • With bank reconciliation, you and your stakeholders can make decisions based on your bank records and financial statements, understanding both are accurate.
  • This statement is used by auditors to perform the company’s year-end auditing.
  • Otherwise it may be necessary to go through and match every transaction in both sets of records since the last reconciliation, and identify which transactions remain unmatched.

If left to build up for too long, errors and discrepancies can build up and may start to impact your business and cash flow. Consider how high your transaction volume is and find a reasonable medium that strikes a balance between being practical and taking over your time. Many choose to schedule reconciliation to take place prior to credit control meetings so the data is as up-to-date as can be. This means aspects such as your bank statement balance and bank reconciliation statement will be relevant and any bank service fees or interest income from transactions will be accounted for.

When there are no unexplained differences, accountants state that the bank statement has been reconciled. Bank reconciliation plays an important role in getting detailed visibility into cash availability, accurate reporting, fraud detection, faster financial close, and seamless audits. Regular bank reconciliations can help businesses identify any conflicting items on bank statements and take necessary action immediately. A bank reconciliation statement is important in managing your business’ finances. This document can help ensure that your bank account has a sufficient balance to cover company expenses. It’s a tool for understanding your company’s cash flow and managing accounts payable and receivable.

To see your business as it is

Any discrepancies discovered during this process can then be addressed. Bank account reconciliation is comparing your bank statement to your business’s internal list of transactions over a given time period. During bank reconciliation, you’ll compare the two accounts to ensure they reflect the same transaction details and cash flow amounts.

Interest and Dividends Collected by the Bank

This process accurately reflects all transactions, thereby making your financial monitoring accurate and transparent. It serves as a check to verify that all transactions have been recorded correctly in the company’s and the bank’s records. A bank reconciliation is a process performed by a company to ensure that its records (check register, general ledger account, balance sheet, etc.) are correct. This is done by comparing the company’s recorded amounts with the amounts shown on the bank statement.

Subscribe to Chaser’s monthly newsletter

Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both sides mentioned at the bottom match. You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals 4 ways to protect your inheritance from taxes or the cheques issued but not yet presented for payment. To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank.

At the bottom of your spreadsheet for February, add this note, tracking changes to your balance. Bankrate follows a strict
editorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. Our experts have been helping you master your money for over four decades.

Step 2: Review the deposits and withdrawals

Record any bank fees, interest income, or errors found on the bank statement that are not yet in your accounting records. Compare each transaction from your accounting records with those listed on the bank statement to spot any differences. If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise! Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid).

Written by: Lucia

Rate it

Previous post


Return on Capital Employed ROCE Formula + Calculator

It shows the business makes more money than it spends on its capital costs, like loans or investments. Interpreting the ROCE ratio goes beyond just crunching numbers—it’s about understanding what those numbers say regarding your company’s efficiency in using capital to generate profits. Are you trying to figure out how efficiently your business is using its capital? Understanding the return on capital employed, or ROCE, is crucial for investors and business owners alike. In other iterations, the capital employed can be defined […]

todayMay 7, 2021