Bookkeeping 101: What is Bank Reconciliation?

September 30, 2020
Reviewing bank passbook saving account balance and cash flow statement analysis for a return on investment, ROI, and business performance

Bank reconciliation is a useful tool for both external and internal financial records. It can assist you in significant ways to protect your finances. It can also help you determine whether there are errors in your transactions and, if so, how you can correct them.

However, there are two things that you should know about bank reconciliation. You may not be familiar with the process of bank reconciliation, and you also may not know how often to do bank reconciliation. Here is what you should know about bank reconciliation, the process, and how it can help you.

What is Bank Reconciliation?

Bank reconciliation occurs when you compare your financial statements to that of your banking institution. This will help you notice potential discrepancies, and it will also allow you to determine how the discrepancy occurred. 

Why is Bank Reconciliation Important?

Bank reconciliation is essential for bookkeeping needs. It serves two primary purposes: to prevent administrative problems and to prevent fraud.

As you complete bank reconciliation, you should look for any administrative problems. Administrative errors can cover a wide range of issues from banking institutions and customers. You’ll want to: 

  • Avoid bank fees for insufficient funds 
  • Avoid using lines of credit 
  • Avoid bounced checks 
  • Catch any banking errors 
  • Keep track of outstanding checks  
  • Know if customer payments have bounced or failed 
  • Know how much cash you have in your accounts 

As you complete bank reconciliation, you should look for potentially fraudulent activities. This may include: 

  • Changed checks
  • Duplicated checks
  • Missing deposits 
  • Unauthorized cash withdrawals 
  • Unauthorized transfers

What Do You Need?

You’ll need your bank records and bank statements to complete a bank reconciliation statement. You should have statements for the most recent month, the previous month, and closing balances. 

How to Do Bank Reconciliation

Completing a bank reconciliation step comprises three steps: comparing statements, adjusting balances, and recording your reconciliation. A description of each step follows. 

Compare Statements

The first step involved in bank reconciliation is to compare your bank statements versus your business transactions. You’ll want to ensure that all of your transactions are present on your bank statement and your financial records. 

Adjust Balances

The second step to complete bank reconciliation is to adjust your balances. There are two approaches to this step: adjusting the ratio according to bank or books. 

If you adjust your balances per bank, consider any delays that you may encounter. This can occur if customers pay with checks or make large purchases that require more time for processing. 

If you adjust your balances per book, consider any fees associated with your balance. You may be liable for bank fees that you may not include in your financial records as a journal entry. 

Similarly, you may need to adjust your balances to account for interest. If you forget to include note this amount, you’ll have further difficulties ensuring that your balances are equal.

Record Reconciliation

The last step to complete bank reconciliation is to record reconciliation. The goal of bank reconciliation is to have your balance equal in both your bank statement and financial records. 

You have the choice of how frequently you want to make bank reconciliation statements. For the most accuracy with your transactions, you can record reconciliations daily. If you’re going to examine more transactions, it may be better to record reconciliations monthly or quarterly.

Work with the Pros

Bank reconciliation is one of the most critical bookkeeping duties. Work with the pros to ensure that you don’t have any bookkeeping problems.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.