Bank Reconciliations: Everything You Need to Know

With so many people falling victim to bank fraud, it’s time to talk about bank reconciliation. Knowing how much money is in your bank account can help you stop overdrawing your account and help you build your balance. 

If you haven’t talked about bank reconciliation since your early days of high school, it is time to reconnect with the balance it brings. No pun intended. 

Let’s look at bank reconciliation, why it matters, and how you can do it quickly and effectively. 

What is Bank Reconciliation?

The keyword of the task is reconciliation, which involves bringing harmony to your financial accounts. When you reconcile your bank accounts, you look at your bookkeeping, so you ensure that you can account for your money. When you reconcile your accounts, you notice discrepancies and financial problems to solve. 

Who Reconciles Bank Accounts?

In the days before online banking, schools taught students how to reconcile their checking and savings accounts. Now, anyone can reconcile their bank accounts with basic online and offline tools. Some people prefer to look at their financial accounts themselves, while others prefer to hire an accountant or bookkeeper to do the work. 

You can reconcile your accounts with two different methods: accrual or cash. With the accrual method, you record revenue and expenses. With the cash method, you record transactions when they post, like banks do. If you check your bank account regularly, reconciliation is relatively easy. 

Large companies rely on accountants to reconcile their accounts, while small companies rely on the owners or a part-time bookkeeper. 

Why Should You Reconcile Your Bank Accounts?

The process might seem tedious, especially if you check your accounts online. But, if you value your finances, you don’t just watch them, you analyze them. 

See What Your Money is Doing

Whether or not you have a business, when you reconcile your accounts, you see exactly what is happening with your money. If you have a business, you know exactly how your business finances are doing because you match the deposits and withdrawals. 

If you don’t have a business, you can see where you have money left over that you could invest or use to pay your debt. 

Monitor Cash Flow

When you reconcile your accounts, you can keep a close eye on your cash flow. You get to analyze how and when the money enters your business and how long it takes before it gets into your bank account. Understanding what you do with your cash helps you better manage it to grow your business. 

Notice When Fraud Occurs

Fraud is unpredictable, so you need to keep tabs on your bank accounts to recognize when it happens to you. Keep in mind that fraud doesn’t just happen online. A vendor might tamper with a check, and you wouldn’t know it unless you reconcile your account by looking at the checks you wrote and who cashed them. 

You might also find fraud within your business. Your partner might draw money, but not record the amount accurately. Maybe your employees are taking cash. The only way you find out is if you reconcile your accounts at the end of each month. 

See Bank Mistakes

Sometimes banks make mistakes. The only way you would find out if your bank made a mistake is to reconcile your account. If you see a mistake, you can talk to your bank and show the proof from your bank reconciliation process.

Monitor Your Accounts Receivable

Companies that use the accrual system will debit their cash accounts with the expectation that a check is coming from a client. Hopefully, your clients pay on time, but in reality, some don’t. So, when you reconcile your account, you will see what clients still owe money. Your bookkeeping technique might show a payment arrived, but with reconciliation, you’ll see that it hasn’t. 

Accounts receivable bring money into your business, so you should know what is happening with that column in your books. If you have any discrepancies, it’s time to look at your clients and possibly your bank. 

How to Reconcile Your Bank Account

Bank reconciliation involves looking at transactions and making sure they match your bookkeeping records. The hope is that your accounts aren’t out of sync. If they are, you have to make corrections and record what you fixed while finding harmony in the balances. 

There are several steps involved in bank reconciliation, but before you begin, your books must be accurate. If they aren’t, you cannot reconcile your accounts. To start the process, you need the current and previous monthly bank statements. You also need your books with accurate transactions. Pay attention to your bank account’s closing balance. 

Check the Cash Balances

The first step is to look at your cash by reconciling the cash in the bank and the cash in your books. Ideally, the ending monthly balance should be the same in both accounts. Unfortunately, too many business owners find that their cash accounts rarely match. Fortunately, you can easily resolve the problem. 

The first reason why so many cash accounts do not match is service charges. Banks often limit the number of deposits and withdrawals businesses make, then they charge fees. Look at your bank fees to see if that amount helps you balance your accounts. 

Another reason you might have imbalances in your cash accounts is a bounced check. You may have written the check, or a customer may have written one resulting in a smaller deposit. 

When you are reconciling your cash accounts, know about the outstanding transactions. First, you might have an outstanding check or withdrawal that the bank has not processed. Second, your account might have an outstanding deposit, often as a result of the money recorded in the books, but the bank has not processed it. 

The outstanding transaction can slow your reconciliation. When you reconcile your accounts, you have to track the outstandings as they will eventually show up in the bank. 

How to Record Your Reconciliations

If you are doing your own reconciliations, you need to know how to record the items that do not match. Your accountant will know what to do, but you should know that you have two options. 

Adjust the Journal

The first option is to adjust your journal entries. When you record money that moves in and out of your books, you record them as debits and credits. You should record the debits and credits in your general ledger, either on a digital spreadsheet or in a manual, handwritten ledger. 

When you are finished reconciling, you make a note in your ledger about the discrepancy. The note should include why the discrepancy exists and how much it was. 

File a Reconciliation

The second option is to use a special bank reconciliation statement. The only difference between this method and the journal adjustment is where you file the information. Rather than recording the fix in a ledger, you record a separate file and save it. 

The method you choose should fit your bookkeeping preferences. Put the document or note in a convenient spot so you can find it again when you have to look through financial records. 

When Should You Reconcile Your Bank Statements?

The answer depends on the volume of your bookkeeping transactions. If your bank account is busy and you record several transactions each month, you should reconcile regularly. Some businesses reconcile each day, while some do it more than once per day. Some businesses only reconcile once per week or month. You get to choose the frequency. 

You may want to reconcile more often because you keep your financial records up to date. The more often you do it, the easier it gets because you have less to reconcile. 

Consider if you haven’t reconciled your account in a year. If you have twelve months of bank statements, you have to go through all of them as well as every entry in your ledger. You might only need to reconcile once per year. But if you have a large volume of transactions, you should check your finances frequently. 

Smart business owners have a regular bank reconciliation schedule. They add the process to their hourly, daily, weekly, monthly, or seasonal plans. If you don’t reconcile regularly, the bank statements add up, and the stress does, too. Reconciling can be quick if you do it regularly, or it can be stressful and time-consuming if you don’t. 

What a Reconciliation Looks Like

In the real world, bank reconciliation matters. When you look closely at your finances, you will frequently see discrepancies. The process might look something like this: 

Step One: Compare Your Books and Statements

Let’s say you are looking at your March books. You find that you have a ledger balance of C$2015 and a bank balance of C$1980. You have a difference of C$35. 

Step Two: Analyze Your Bank Statement

Since your balances don’t match, you have to analyze your March bank statement to find the C$35 difference. You find a few fees. The first is a C$8 money transfer fee, a checking account fee of C$10, and a check that you forgot to post in your ledger for C$17.  

To find harmony in your two accounts, you record the forgotten check and fees in your ledger. Now, your bank balance and your ledger match. You now know exactly how much cash you have on hand at this point. 

Step Three: Make the Adjustments

When you fix your account, you have to adjust your ledger. You can do this by deducting the withdrawals for the fees and the undocumented check. You should record each fee separately and include the check with the check number. Since you didn’t record the check, you should investigate who wrote it. 

As you record the fees and the check, include the transaction date as well as the transaction. At the end of the ledger, you can include the words “Adjusted balance” with the new amount that matches your bank statement. After you’ve adjusted your ledger, you have your actual balance for the end of March. 

Step Four: Document the Reconciliation

After adjusting your ledger, the next step is to record it in your books. The bank will process outstanding deposits and withdrawals, and you have to be sure your books document everything that was out of alignment. 

Short-Form Notation

You can do this by making a brief notation in the cash portion of your ledger. You could also create a long-form reconciliation statement. If you make the note in your cash ledger, you simply record the changes. You include the month (March), the ledger balance (C$2105), and your bank balance (C$1980). 

Then, you record how many outstanding fees you had along with the missing check. That’s it. 

Long-Form Reconciliation

However, if you prefer to record the long-form reconciliation statement, you include your business name and your bank statement date, along with the type of account you are reconciling, like checking or savings. The next step is to list each outstanding withdrawal on an individual line. You can see how long this process is if you have several missing transactions. 

Then, you record outstanding deposits, one line for each. If you do not have any, you still record this section and the number zero. Finally, you create a final statement of your ledger balance, outstanding deposits and withdrawals, and the bank statement balance. 

Feeling the Harmony

If you haven’t reconciled your bank accounts for a long time, you might feel some stress when you first begin the process. But, after a while, you will see why so many bookkeepers find the bank reconciliation steps calming and harmonious.

Whether you find the process stressful or calming, bank reconciliation matters. When you reconcile your accounts, you prevent overdrafts, you understand your bank fees, and you notice when fraud occurs. Staying in control of your money makes you a better business owner, and as you can see from this article, it doesn’t take much to reconcile your ledger and bank account.