What Is Bank Reconciliation?
Bank reconciliation means comparing your bank statement’s listed transactions with your business’s internal records, then adjusting your internal accounting records to ensure they’re accurate. It’s also the foundation of small-business accounting and bookkeeping, so you’ll want to familiarize yourself with the process as soon as possible—you’ll be doing it pretty often.
Business.org explains more about what bank reconciliation is, why (and how often) you should do it, and how to make bank reconciliation both fast and accurate.
Bank reconciliation table of contents
What is the definition of bank reconciliation?
During the bank reconciliation process, you’ll compare your bank statements to your business’s financial records. You’ll note any differences between your business’s cash records and your bank’s records, then adjust your internal records to ensure their accuracy. At the end of the process, both your bank account and general ledger (GL) should match, and any differences between the two records should be resolved (or reconciled).
What is the purpose of bank reconciliation?
So why do you need to reconcile your accounts? For one thing, it helps you catch financial mistakes before they become bigger problems. For example, if you entered a check amount into your general ledger but forgot to physically cash that check, you’ll discover the error during the bank account reconciliation process.
Or maybe you scheduled a rent payment and listed it in your chart of accounts as usual, but the notification that your payment bounced went to your spam folder. As a result, you didn’t notice the payment actually bounced until your end-of-the-month bank reconciliation.
Bank reconciliation also helps you identify fraud or theft and intervene early. If someone has withdrawn funds without your knowledge or consent, bank reconciliation will clue you in.
Finally, bank reconciliation helps you maintain accountability. If you’re working for yourself, you (or your accountant or bookkeeper) will perform bank reconciliation. But if multiple people handle your business’s finances, the person reconciling the accounts should probably be different from the person signing the checks.
How often should you perform bank reconciliation?
You should perform bank reconciliation at least every month—which is how often your bank sends a bank statement. A single 30-day period should give you a manageable number of transactions to compare between accounts.
Of course, you can perform bank reconciliation as often as you like. Depending on the amount of transactions you have each month and the level of oversight you want to impose, you might reconcile your accounts weekly or even daily. (And remember to perform a monthly bank reconciliation for every business bank account—you may have more than one.)
How should you do bank reconciliation?
When you’re performing bank reconciliation, you’re basically following the same process as balancing a checkbook—you’re just doing it on a business-wide scale instead of a personal one. Here’s what that looks like in practice.
1. Obtain copies of and compare pertinent records
To reconcile your bank accounts, you’ll first need a copy of your most recent bank statement and access to your business’s accounting records. Specifically, you’ll want access to the general ledger and cash book, which records your cash and bank transactions. Compare each bank transaction to the corresponding transaction as recorded in your general ledger, ensuring the documents match.
2. Resolve any discrepancies
Make a note of any discrepancies between your bank statement balance, cash balance, and transaction history.
Typically, differences in cash amounts can be explained by one of the following scenarios:
- Deposits in transit are payments your business has received but that your bank hasn’t yet recorded.
- Outstanding checks are payments your business has made but that haven’t yet been recorded by your bank.
- Interest payments accrue automatically on cash you’ve deposited into interest-bearing checking or savings accounts.
- Bank fees can accrue if you bounce a check, miss a payment, or fail to maintain the minimum balance your bank has set.
Add the amount of deposits in transit and subtract the amount of any outstanding checks from your bank statement’s cash balance to arrive at (and record) an adjusted bank balance. Similarly, add any interest payments or bank fees to your business’s cash accounts to find your adjusted cash balance.
Adjusted bank balance: Initial cash balance + cash amount of deposits in transit – cash amount of outstanding checks
Adjusted cash balance: Business cash accounts balance + interest payments + bank fees
Hopefully, once you’ve dealt with deposits in transit, outstanding checks, interest payments, and bank fees, your bank statement and internal accounting records will match. If they don’t, you’ll need to dig a little deeper. Did a check bounce? Does a customer owe you a payment? Do you need to account for an interest payment or overdue debt? Resolving the issue could mean paying a bill, depositing a check, or entering a forgotten transaction into your general ledger.
Once you’re done comparing the accounts, reconciling any problems, and adjusting your bank and cash balances, there should be an unreconciled difference of $0 between your general ledger and bank statement.
3. Generate a bank reconciliation statement
A bank reconciliation statement is a financial document that summarizes your bank account transactions and internally recorded transactions, showing that the two records match. You don’t necessarily have to create a bank reconciliation statement every time you reconcile your accounts—if you perform bank reconciliation every day, you probably shouldn’t. Otherwise, though, statements are a good way to stay on top of your business’s finances. You should create them and hold on to the copies.
The statement should include the following information:
- Your ending bank account balance
- Your ending internal book balance
- Any difference between the two balances
- Adjustments made to your records of the two accounts (e.g., adjustments for deposits in transit)
Again, if you have an unreconciled difference that isn’t $0, you need to figure out the source of the problem ASAP. Otherwise, you won’t be able to make accurate financial decisions—how can you, if your actual bank account balance doesn’t match your business’s records?
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Who can perform bank reconciliation for your business?
An accountant can take care of bank reconciliation on your behalf. You can also perform bank reconciliation by hand, meaning you’d manually compare your bank statement to your general ledger transaction by transaction. Or, if you use accounting software to track your business’s finances and generate financial statements, the software should have a built-in method to speed up bank reconciliation.
For instance, if you use QuickBooks Online, you’ll use the reconcile function to pull up all your bank transactions during a period of time you specify. QuickBooks then shows you all the transactions you entered into the software during the same time period. You’ll compare the two lists and check a box next to each QuickBooks transaction that also shows up on your bank statement. When you’re done, you’ll see a difference of zero, meaning the accounts match. If you don’t see a balance of zero, QuickBooks helps you troubleshoot the errors and reconcile your accounts.
Bank reconciliation FAQ
What is a bank account reconciliation?
Bank account reconciliation is comparing your bank statement to your business’s internal list of transactions over a given time period. During bank reconciliation, you’ll compare the two accounts to ensure they reflect the same transaction details and cash flow amounts. If the accounts don’t match, you’ll need to find the source of the financial discrepancy, repair it, and compare the accounts again to see if they balance.
What is the purpose of bank reconciliation?
Bank reconciliation ensures your business’s internal financial records accurately reflect your cash flow. With bank reconciliation, you and your stakeholders can make decisions based on your bank records and financial statements, understanding both are accurate.
What are the steps for bank reconciliation?
To perform bank reconciliation, follow these steps:
- Obtain a copy of your bank statement from each of your business bank accounts.
- Open your general ledger.
- Compare each transaction listed in your bank statement to the transactions recorded in your general ledger.
- Adjust your bank account balance to account for outstanding checks and deposits in transit.
- Adjust your cash balance to account for bank fees and interest payments.
- Resolve any remaining discrepancies. (This could mean depositing a check, paying a bill, or simply making a GL journal entry to list a transaction you forgot to include.)
- Generate a bank reconciliation statement for your records.
Bank reconciliation might seem complicated the first time you try it, but it gets easier with practice—and trust us, you’ll have lots of opportunities for that. And don’t forget that if you’d rather not handle bank reconciliation by hand, accounting software—including free accounting software options—should minimize some of the hassle.
Want to learn more about small-business bookkeeping? Check out our bookkeeping basics to continue setting up your books and building a solid financial foundation for your new business.
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