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Plus, there’s something Zen about bank reconciliations. They are about finding balance, after all.
So, assume the full lotus position or just find a comfy chair. We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task.
First off, what is bank reconciliation?
When you “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy. Then, you make a record of those discrepancies, so you or your accountant can be certain there’s no money that has gone “missing” from your business.
Bank reconciliations aren’t limited to just your bank accounts. Any credit cards, PayPal accounts, or other accounts with business transactions should be reconciled.
Who’s responsible for bank reconciliations?
If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below). If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you.
You only need to reconcile bank statements if you use the accrual method of accounting. This is to confirm that all uncleared bank transactions you recorded actually went through.
If, on the other hand, you use cash basis accounting, then you record every transaction at the same time the bank does; there should be no discrepancy between your balance sheet and your bank statement.
Not sure which accounting method you’re using? This article on cash vs. accrual accounting will make it clear.
In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality. In a small business, that responsibility usually falls to the owner (or a bookkeeper, if you hire one. If you don’t have a bookkeeper, check out Bench).
Five compelling reasons why bank reconciliations matter
Bank reconciliations may be tedious, but the financial hygiene will pay off. Here’s why it’s a great idea to do them.
1. To see your business as it really is
When you look at your books, you want to know they reflect reality. If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.
2. To track cash flow
Managing cash flow is a part of managing any business. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account, and plan how you collect and spend money accordingly.
3. To detect fraud
Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened.
For instance, you could pay a vendor by check, but they could tamper with it, making the amount withdrawn larger, and then cash it. You wouldn’t know until the bank charges your account. The discrepancy would show up while you reconcile your bank statement.
Or you might share a joint account with your business partner. When they draw money from your account to pay for a business expense, they could take more than they record on the books. You’d notice this as soon as you reconcile your bank statement.
Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening.
4. To detect bank errors
It’s rare, but sometimes the bank will make a mistake. If there’s a discrepancy between your accounts and the bank’s records that you can’t explain any other way, it may be time to speak to someone at the bank.
5. To stay on top of accounts receivable
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).
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.
How to do a bank reconciliation
To make things easier, start with a free template to work off of.
When you do a bank reconciliation, you first find the bank transactions that are responsible for your books and your bank account being out of sync. This lets you match balances. Then, you record what you did to match the balances.
We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? They need to be in order for the bank reconciliation to work. If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you).
First, check your two cash balances
You have two cash balances to check: the cash recorded on your bank statements and the “cash account” section of your bookkeeping records.
More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February).
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.
One reason for this is that your bank may have service charges or bank fees for things like too many withdrawals or overdrafts. Or there may be a delay when transferring money from one account to another. Or you could have written a NSF check (not sufficient funds) and recorded the amount normally in your books, without realizing there wasn’t insufficient balance and the check bounced.
Two important terms to know:
- Outstanding check/withdrawal. This is a check or money transfer you’ve issued and recorded on your books which is still uncleared.
- Outstanding deposit/receipt. (Also called deposits in transit.) This is money that has been received by your company and recorded on the books, but which has not been processed by the bank.
There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them.
Recording bank reconciliations
Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. There are two ways to do this.
Option 1: Adjusting journal entries. Journal entries are how you record all your transactions (sometimes called debits and credits). All your journal entries are gathered in the general ledger. If you’re not using accounting software, then this is probably an Excel sheet or a handwritten document. At the end of the period for which you’re reconciling your bank statements, make a note recording why there’s a discrepancy between your bank transactions and your ledger.
Option 2: A bank reconciliation statement. This contains the same information as an adjusting journal entry, but it’s kept on file as a separate document.
The method you choose is up to personal preference and need. Consider when or why you might need to look back through your financial records for your bank reconciliation, and which method of recording will make the task easier for you based on how you keep your records.
How often to reconcile bank statements
For the most part, how often you reconcile bank statements will depend on your volume of transactions.
Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis.
For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash. They might reconcile on a daily basis to make sure everything matches and all cash receipts hit the bank account. On the other hand, a small online store—one that has days when there are no new transactions at all—could reconcile on a weekly or monthly basis.
It’s important to keep up to date. The more frequently you reconcile your bank statements, the easier it is each time.
For instance, if you haven’t reconciled your bank statements in six months, you’ll need to go back and check six months’ worth of line items. Whether this is a smart decision depends on the volume of transactions and your level of patience.
It’s best to have a regular schedule. Decide how frequently you’ll reconcile, then stick to it. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. And it will keep you in tune with your business’s cash flow.
Bank reconciliation example
Suppose you run a business called Greg’s Popsicle Stand. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data.
There are three steps: comparing your statements, adjusting your balances, and recording the reconciliation.
Step one: Comparing your statements
First, you compare your bank statement for the month of February with your cash book balance for the end of February. They look like this:
Bank balance: $1,081
Cash book balance: $1,200
Second, you go through your bank statement, and find the following line items not included in your cash book:
Email money transfer fees, multiple dates: $7
Checking account fee on Feb. 28: $12
Third, you go through your cash book, and find the following line items not included in your bank statement:
Check deposited on Feb. 27: $8
Check deposited on Feb. 28: $4
Check issued on Feb. 28: $20
With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.
Step two: Adjusting your balances
Adjustments to bank account balance
Original balance: $1,081
Step 1: Add outstanding deposits
Step 2. Deduct outstanding withdrawals
Adjusted balance: $1,181
Adjustments to books balance:
Original balance: $1,200
Step 1: Add outstanding deposits
Step 2: Deduct outstanding withdrawals
Adjusted balance: $1,181
Now your bank statement shows the same end-of-month balance for February as your books: the real balance of $1,181.
Step three: Recording the reconciliation
When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions.
You have two options for recording your bank reconciliation. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed).
A cash book note:
At the bottom of your spreadsheet for February, add this note, tracking changes to your balance.
Bank reconciliation statement:
Business name: Greg’s Popsicle Stand
Bank statement date: February 28, 2018
Bank account: Business Checking
For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. For others, it makes DIY bookkeeping that much more stressful. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you.
If you’re looking for a good bookkeeper, check out Bench. We’re North America’s largest bookkeeping service. We’ll take bookkeeping completely off your hands (and deal with the bank reconciliations too).
