Have you noticed that your business records don’t always line up with the statement you receive from the bank? Don’t freak out—this is common for businesses of any size and can be further investigated by going through a process known as bank reconciliation.
In this in-depth guide, we’re sharing everything you need to know about the bank reconciliation process. Find out what bank reconciliation is and how often you should go through the process.
What is Bank Reconciliation?
Bank reconciliation is a process businesses go through to identify discrepancies between their bank account statement and general ledger.
Before we get started, it’s important to understand what these financial statements are:
- Bank Statement: A bank statement is a list of receipts from the bank that includes all the transactions the bank believes your business has made over a period of time.
- General Ledger: Also known as a cash book or accounting journal, this is a collection of your business records (or journal entries) that shows all the transactions you believe have occurred over a period of time. Some business owners use Microsoft Excel as their general ledger but we generally advise against this.
In an ideal world, the bank statement (which shows your ending balance for the month) would always match the general ledger, but several factors can cause discrepancies.
Reasons for differences between the bank statement and general ledger include:
Small business owners may experience mistakes in managing the books because they aren’t classically trained to create accounting records and, frankly, they have a lot of other equally important tasks on their plate. For example, the simple act of losing a receipt may lead to an inaccurate general ledger, but the transaction will still appear on the bank statement.
Some transactions may appear as though they occurred at different times on each statement. For instance, an apartment complex may record an online rent payment on the last day of the month, but the bank is unlikely to process the transaction until the following day. Additionally, some businesses may wait several weeks to deposit checks which may prevent them from being shown on the current bank statement.
Bank fees, interest earned, and bounced checks are unexpected figures on your bank statement that you won’t be aware of until Bank fees, interest earned, and outstanding checks are unexpected figures on your bank statement that you won’t be aware of until receiving it. Contact your bank to clarify their fee structure and interest rates so you can more accurately predict this number before receiving the statement.
To summarize, businesses go through the bank reconciliation process because their financial records don’t always line up with what the bank says. These discrepancies are normal, but fixing them is the key to determining the financial health of your business.
Bank reconciliation allows you to calculate the actual cash balance of your business by cross-referencing the bank statement with the general ledger to account for differences.
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How Often Should You Reconcile Bank Statements?
Although most businesses do bank reconciliation once a month, how often (and when) you go through the process depends on the unique needs of your business.
For instance, a large business with a high sales volume may opt to do daily reconciliations using month-to-date bank statements. Daily reconciliations help accurately track finances while reducing the risk of fraud by identifying unauthorized transactions and blocking them before they have time to process.
Smaller businesses may not have the time or resources to perform daily reconciliations, but they can still adjust when they go through the process to cater to their needs. Many small businesses that are seasonal or heavily busy during one part of the month shift their reconciliation process to a less busy time in order to focus on serving customers.
You can save time by gathering information ahead of time to disperse the work, or by using accounting software to automate the bank reconciliation process.
Excel Bookkeeping Bank Reconciliations
The bank reconciliation process can easily be broken down into six simple steps:
- Compare your general ledger to the bank statement
- Check off any items that appear on both statements
- Note the remaining items as discrepancies
- Write down the non-matching cash balances from each statement
- Add and subtract the discrepancies to the opposite statement you found them on
- The totals for each statement should match to reflect the actual cash balance of your business
If you’re doing bank account reconciliations in QBO, we have very specific instructions you can follow.
Bank Reconciliation Example
For this example, let’s take a look at Frank’s Family Furniture store. Frank is going through his bank reconciliation process at the end of the month. He has noticed different cash balances between the ending balance on his bank statement and his general ledger for both the business cash accounts and credit card accounts.
The image above shows the August 2019 bank statement for Frank’s Family Furniture. The starting balance is the same as noted in the general ledger below, but the final balance doesn’t match. He’ll need to use the steps we laid out to find the discrepancies. Frank needs to reconcile his general ledger against his bank statement (which is the source of truth) to correct his general ledger with the actual cash balance for the end of the month.
Frank starts by checking each statement and highlighting figures that appear on both statements in green. Things start off well, but towards the middle of the month Frank notices some differences between the two statements and marks them in red.
Frank notes the bank statement has a $100 service charge (noted in his bank statement as a Bank Fee) deduction on 08/15 along with a $120 account interest charge on 08/31. He does not have these reflected in his general ledger. Frank also notices that although check no. 218 appears on both statements, the amounts differ. Frank checks his records and finds he did not enter the amount into his Excel file correctly, leading to the discrepancy.
After reviewing the bank statement and account balances, Frank is ready to update his general ledger. This is where it can get tricky, it’s time to make adjustments in the form of debits and credits to the general ledger. Frank has updated the check amount error on 08/20 so he moves onto the rest of the ledger. Check no. 219 is a customer check that has been recorded in the general ledger but has not been deposited into the bank yet. Additionally, there is a $1,000 payment on the last day of the month that has not yet been processed by the bank.
Now that all discrepancies have been noted, Frank can reconcile his finances to determine the actual cash balance of his furniture business.
Frank notes the starting balance of each document and then adds and subtracts missing figures on each side. After performing these calculations Frank finds that the actual cash balance for his business at the end of this month is $48,920.
How to Automate Bank Reconciliation
The example detailed above makes bank reconciliation seem simple, but it can get more complicated when you’re cross-referencing hundreds or thousands of transactions. ScaleFactor can help you automate these tiresome and tedious tasks using our powerful accounting software so you can everything else on your plate.
Learn how ScaleFactor can automatically track and classify transactions for simple bookkeeping that allows you to predict cash flow up to six months out. Schedule a demo today!
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