As a business owner, it’s important to keep track of your financial transactions to ensure that your company is running smoothly. Reconciliation is an important process that helps you confirm your business’s financial records are accurate and in line with your bank statement. A common type of reconciliation is bank reconciliation, which compares your bank statement to your company’s records of cash transactions. In this article, we are going to walk you through the process of bank reconciliation and provide you with some best practices and examples.
BANK RECONCILIATION: WHAT IS IT?
Bank reconciliation is the process of comparing two sets of records: your company’s bookkeeping transactions and your bank statement. Bank reconciliation is important because it helps identify any discrepancies between the two sets of records, such as transactions that were not recorded in your company’s books or bank fees that were not properly accounted for.
HOW TO DO BANK RECONCILIATION
The following are the steps that you need to take to do bank reconciliation:
- Collect necessary documents: You need to collect your company’s bank statement and bookkeeping records (e.g., cash receipts, disbursements, etc.) for the period being reconciled.
- Match transactions: This involves comparing and matching the transactions on your company’s books with those on your bank statement. Look for errors, missing transactions, or items that don’t match.
- Record adjustments: Create journal entries or other adjustments in your accounting software based on the discrepancies you found.
- Reconcile the balances: After the adjustments, make sure that the ending balance on your bank statement matches the ending balance in your company’s books.
- Create a reconciliation report: After you complete the above steps, create a report to document the reconciliation process and findings for future reference.
BANK RECONCILIATION EXAMPLE
Let’s start with an example. Assume that Jack’s company’s bank statement has an ending balance of $10,000 for the month of April, while the company’s books show an ending balance of $9,800. Jack needs to reconcile the bank account balance to ensure that it is accurate and determine the reasons for the discrepancy. The following shows a sample bank reconciliation statement:
Bank Reconciliation Statement
| Bank Statement Balance | Add: Deposits in Transit | Deduct: Outstanding Checks | Adjusted Bank Balance |
|---|---|---|---|
| $10,000 | $600 | $400 | $10,200 |
| Book Balance | Add: Interest Earned | Deduct: Monthly Bank Fees | Adjusted Book Balance |
|---|---|---|---|
| $9,800 | $50 | $50 | $9,800 |
In this example, the adjusted bank balance is $10,200, and the adjusted book balance is $9,800. The difference is $400, which represents the outstanding checks.
BANK RECONCILIATION BEST PRACTICES
Here are some best practices to follow when doing bank reconciliation:
- Reconcile monthly: Bank reconciliation should be done monthly to ensure accurate financial records.
- Enter transactions daily: Enter transactions daily into your company’s books to minimize errors and ensure that your records are up-to-date.
- Keep proper documentation: Keep all receipts and documents related to bank transactions to support your reconciliation process.
- Be consistent: Follow the same process and reconciliation procedures each time.
- Double-check everything: Always double-check the accuracy of your records and the reconciliation process.
FAQ
What is the difference between bank reconciliation and bookkeeping?
Bank reconciliation is a process that compares your company’s bookkeeping transactions with your bank statement. In contrast, bookkeeping is the general recording of your financial activity, which includes entering transactions in your accounting software, generating invoices, and balancing your cash balances.
What are some common reconciliation errors to avoid?
Common reconciliation errors include forgetting to record transactions, entering transactions incorrectly, and entering the wrong transaction amounts. To avoid these errors, keep proper documentation, enter transactions daily, and double-check your work!
VIDEO TUTORIAL
Check out this video tutorial on how to do bank reconciliation:
CONCLUSION
Bank reconciliation is an important process that helps ensure your company’s financial records are accurate and in line with your bank statement. By following best practices and avoiding common errors, you can ensure that your reconciliation process is efficient and accurate. Remember to reconcile your bank accounts monthly, enter transactions daily, keep proper documentation, be consistent, and double-check your work.
Sources:
- https://www.investopedia.com/terms/b/bankreconciliation.asp
- https://www.accountingtools.com/articles/what-is-bank-reconciliation.html
- https://www.thebalancesmb.com/bank-reconciliation-steps-with-examples-393007
