What is bank reconciliation?
Bank reconciliation is the process of tallying a company’s accounting records with corresponding information from a bank statement. A bank reconciliation statement is a logbook that contains details about a bank account's transactions.
Account holders use their bank statements to monitor their finances. The bank reconciliation statement aims to identify any discrepancies between the cash book and the bank passbook.
A cash book is a financial journal that contains all cash receipts and disbursements, including bank deposits and withdrawals. On the other hand, a bank passbook refers to a physical or digital notebook held by bank account holders. It records on paper the details of all banking transactions.
Many businesses use accounting software to ensure proper account reconciliation of their transactions and accounting records.
Bank reconciliation statement benefits
Organizations and institutions use bank reconciliation statements to keep transactions in check and avoid any discrepancies in the future. Below are some key benefits of bank reconciliation statements.
- Detect fraud. Bank reconciliation statements are a fantastic tool for detecting fraud. For example, if a check is modified and the resulting payment is greater than anticipated, effective measures can be taken to prevent unscrupulous activity.
- Locate errors. Bank reconciliation statements also assist in finding errors that might negatively impact financial reporting. Financial statements are frequently used to determine profitability because they provide information about how a company performed financially in the past. Accurate financial statements give companies a clear picture of their cash flow and enable investors to make well-informed choices.
- Pay an accurate tax amount. Reconciling bank statements help rectify discrepancies in tax reporting. Without reconciliation, businesses may stray away from paying the right tax amount.
How to reconcile a bank statement
At the end of each month, the bank sends users a bank statement. The statement lists each deposit the customer makes, including cash and other items. The statement also lists bank fees, such as those incurred for account servicing.Here are four steps to reconcile bank statements.
- Examine the deposits. Compare the deposits on the bank statement to those in the company's records. If the cash book shows a deposit in a month and bank statements do not list it as a reconciling item to be added to the bank's ending cash balance for your account.
- Adjust balances. Adjust bank statements’ balances to reflect the corrected balance. Users must add transitory deposits, subtract unpaid checks, and add/subtract bank errors to accomplish this. Amounts that have been received and recorded by a business but have not yet been recorded by a bank are referred to as deposits in transit. The bank statement needs to include them. Unpaid checks are those that have been written and recorded in the business's cash account but have not yet been paid out by the bank. They must be taken out of the bank account. This frequently occurs when checks are written in the final few days of the month. Errors made by the bank when preparing the bank statement are referred to as bank errors. Usual mistakes include entering the wrong amount or leaving out a certain amount from the bank statement. To identify the errors, contrast the bank statement with the general ledger for the cash account.
- Tweak the cash account. Adjust the business account cash balances by increasing interest or decreasing monthly fees and overdraft charges. Businesses must consider bank fees, returned checks, and accounting mistakes when doing this. This may involve recurring fees or penalties for overdrafts.
- Analyze balances. The adjusted amounts should match after adjusting the balances according to the bank and the books. Finance teams will have to go through the reconciliation process again if they are still unequal. Businesses must prepare journal entries for the adjustments to the balance per book once the balances are equal.
Purpose of a bank reconciliation
Bank reconciliation serves three essential purposes, including:
- Error detection, including missed payments, double payments, and calculation errors.
- Keeping track of and recording bank fees and penalties
- Keeping tabs on the company's payables and receivables
Accounting software makes bank reconciliation simpler and error-free. The automatic import of bank transactions enables users to quickly match and classify many transactions. As a result, the bank reconciliation process becomes more practical and manageable.
Bank reconciliation vs. account reconciliation
A bank reconciliation statement gives an overview of banking and business activity to compare an individual's or an organization’s bank account with its financial records. The statement lists all transactions involving a bank account for a given period, including deposits, withdrawal of funds, and other activities.
Account reconciliation is a crucial step in the financial close process. Accounting professionals and business executives can feel more confident that their companies' books are current, accurate, and complete by regularly comparing the balance in the general ledger (GL) to the balance on an independent statement and examining any discrepancies. It's also a significant result because general ledger balances feed into financial statements, which are used for both internal and external decision-making in a business.
Learn more about the top accounting software to streamline bank reconciliations while avoiding fraud.
Sagar Joshi
Sagar Joshi is a former content marketing specialist at G2 in India. He is an engineer with a keen interest in data analytics and cybersecurity. He writes about topics related to them. You can find him reading books, learning a new language, or playing pool in his free time.
