How to reconcile business bank accounts

Bank reconciliation is simply a part of life for a small business owner, but how can you do it simply?

Despite the widespread use of accounting software by small business owners, organizations must nevertheless compare their bank statements to their personal records on a regular basis. This procedure, known as bank reconciliation, ensures that the company’s records are accurate and assists the company in identifying any anomalies, errors, or fraudulent transactions. In this post, we’ll define bank reconciliation, go over how to do it, list some common concerns that arise during record reconciliation, and show an example of bank reconciliation.

But first, off there are a couple of definitions that we need to clarify.

Bank Statement - this is a list of all of the cash receipts and withdrawals that a business has made over a period of time and it’s managed as you would expect, by the bank.

Cash Book - an accounting record of what a business has in the bank along with all the cash inflows (credits) and cash outflows (debits). It’s managed by the business itself, usually by an accountant or bookkeeper.

So the bank produces a bank statement and the business maintains a cash book. Ideally, the closing balances of both of these should equal each other exactly. However in reality that’s not always the case. It’s actually why the bank reconciliation exists; to make sure that these reports agree on what’s been going on at the bank. I’ll show you how that works in a moment, but first, let me explain why the bank statement and cash book might disagree with each other in the first place.

There are three ways that these differences can come about.

Reason 1- Omissions.

Transactions that appear on the bank statement but have not yet been entered by the business in the cash book are referred to as omissions. Missing receipts, interest received bank fees, and bounced checks are examples of these. A company may not be aware that these transactions or events have occurred until they receive their monthly bank statement.

Reason 2- Timing Differences.

The most typical timing differences are deposits in transit and outstanding checks, which are transactions that are reflected in the bank statement and cash book at different times.

A deposit in transit, often known as an unrecorded deposit by some, refers to money that a company gets and records in its cash book during one period but does not appear on a bank statement until the next. These are typically checks or EFTs (Electronic Fund Transfers) that the firm receives from clients near the end of the month that the bank does not process right away. An outstanding check is one that a company sends to a supplier in one month, but which may stay on their desk for a time before being cashed the following month.

So again we have the timing difference between when the transaction is recorded in the bank statement and the cash book.

Reason 3- Someone has messed up.

Now, these errors can be made by the bank or the accountant preparing the cash book. But more often than not, it’s the accountant. So we first look for errors in the cash book, not the bank statement. Although the bank statement is what we check next. Make sense?

Now that we’ve identified omissions, timing differences, and errors that can all cause differences between the bank statement and the cash book. The purpose of the bank reconciliation is to identify every single one of these errors so we know what the heck is going on. It then tees us up nicely to post a journal entry into the general ledger and bring that cash book up to date by accounting for omissions and correcting errors.

As for timing differences in the bank statement, there are not many accountants can do about those except to identify them and let them sort themselves out in the future.

That’s all well and good but why is this useful? Why is it necessary? Well, we touched on it a moment ago, but bank reconciliation is essential if you want to ensure that your books are up to date and give an accurate picture of the business.

So here are the steps for how to do Bank Reconciliation.

STEP 1: Get copies of the Bank Statement

You will need a list of your transactions to reconcile your data. This information is available via online banking, bank statements, or permitting your bank to exchange data with your accounting software.

STEP 2: Get copies of your business records

You'll also need access to the ledger, or books, of your organization. This data is usually stored in a spreadsheet, a logbook, or an accounting program.

STEP 3: Find your starting point

When you last balance your books are where to start. If you're unsure, attempt to remember the last time your books and bank account balances matched and go from there.

STEP 4: Go through your bank deposits and withdrawals

Ascertain that each deposit is recorded as income in your accounts. Fill in the blanks if something is missing. You must determine whether the transaction was a sale, interest, a refund, or anything else.

STEP 5: Check your income and expenses on your books

Compare your books to your bank statements to ensure that every transaction is accurately recorded. Find out why there is an item that does not match. Maybe a payment hasn't cleared yet, or you forgot that you paid cash for something.

STEP 6: Make a cash balance adjustment

You'll also need to update your records to reflect all of the company's transactions appropriately. This will be accomplished by ensuring that all charges and deposits are properly recorded in the company's cash account.

STEP 7: End balance

After you've matched the records and made the necessary modifications double-check that the final balances are now the same, and the reconciliation process should be finished. If they're still not equal, you'll have to redo the process to locate the problem.

So this is the easy and quick step in reconciling your bank and book statement.

You'll come across mysterious transactions no matter how you complete your bank reconciliation. There will be quantities in one set of records that do not appear in the other. Don't be alarmed by it. This is why you're doing bank reconciliation, and it's usually a simple reason.

FAQ.

What if your business books reveal something that your bank statement does not?

If a transaction doesn't appear on your bank statement, it's most likely because you didn't bank it, or you paid for something with cash or from a different account. Make the appropriate notes and get to the bottom of it.

What if there is something on your bank statement that isn't in your books?

If a transaction doesn't appear in your records, it could be due to a keystroke error when you entered it. It could also be a transaction that you overlooked. Make the necessary changes or adjustments.

How often should my finances be reconciled?

Bank reconciliation should be done once a month. It's easiest to accomplish this towards the end of each month because that's when banks send monthly statements that can be used to reconcile. To adapt to varied business demands, reconciliation can be done at any time utilizing online month-to-date statements.

Do it frequently however you do bank reconciliation. The more you wait, the more difficult it will be to catch up. It won't only take longer to resolve every transaction because you'll have a difficult time recalling the facts; it will take longer overall.

Make a weekly or even daily appointment to do it incrementally. Create a system that allows you to quickly and easily retrieve the records you require.

Summary

Given the amount of time required to complete the bank reconciliation process, some companies attempt to minimize its impact on the period-end closing process by running a daily reconciliation. By doing so, any residual reconciling items at month-end are so minor that they can be completed in a few minutes.

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