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How to Do a Bank Reconciliation: Step-By-Step Process

Bank reconciliation is done by matching the cash balances on the balance sheet to the corresponding amount on its bank statement.

The purpose of the bank reconciliation process is to determine the differences between the internal records of transactions and bank statement and make changes to the accounting records as needed. This helps in resolving any discrepancies in the records and spotting fraudulent transactions.

What this article covers:

How Do You Reconcile a Bank Statement?

To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business.

Businesses maintain a cashbook to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank.

Similarly, the bank too keeps an account for every customer. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals.

Sometimes these balances do not match. The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match.

To do this, a reconciliation statement known as the bank reconciliation statement is prepared.

What Are the Steps to Reconcile a Bank Statement?

You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees.

Once you’ve received it, follow these steps to reconcile a bank statement:

1. Compare the Deposits

Match the deposits in the business records with those in the bank statement. Compare the amount of each deposit recorded in the debit side of the bank column of the cashbook with credit side of the bank statement and credit side of the bank column with the debit side of the bank statement. Mark the items appearing in both the records.

2. Adjust the Bank Statements

Adjust the balance on the bank statements to the corrected balance. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors.

Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. They must be added to the bank statement.

Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account. They need to be deducted from the bank balance. This often happens when the checks are written in the last few days of the month.

Bank errors are mistakes made by the bank while creating the bank statement. Common errors include entering an incorrect amount or omitting an amount from the bank statement. Compare the cash account’s general ledger to the bank statement to spot the errors.

3. Adjust the Cash Account

The next step is to adjust the cash balance in the business account.

To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting.

  • Bank charges are service charges and fees deducted for the bank’s processing of the business’ checking account activity. This can include monthly charges or charges from overdrawing your account. They must be deducted from your cash account. If you’ve earned any interest on your bank account balance, they must be added to the cash account.
  • An NSF (not sufficient funds) check is a check that has not been honored by the bank due to insufficient funds in the entity’s bank accounts. This means that the check amount has not been deposited in your bank account and hence needs to be deducted from your cash account records.
  • Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. The correction of the error will increase or decrease the cash account in the books.

4. Compare the Balances

After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again.

Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books.

How Often Should You Reconcile Your Bank Account?

How often you reconcile your bank account depends on the size of your business. Most businesses should reconcile their bank account on a monthly basis, ideally each time y0u receive a bank statement. This is often done at the end of every month, but it can be done weekly and even at the end of each day if your business has a large number of transactions.

Before the reconciliation process, business should ensure that they have recorded all transactions up to the end of your bank statement. Businesses that use online banking service can download the bank statements for the regular reconciliation process rather than having to manually enter the information.

What Is the Purpose of Bank Reconciliation?

The bank reconciliation process offers several advantages including:

  • Detecting errors such as double payments, missed payments, calculation errors etc.
  • Tracking and adding bank fees and penalties in the books
  • Spot fraudulent transactions and theft
  • Keeping track of accounts payable and receivables of the business

Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. This makes the bank reconciliation process efficient and controllable.

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