Bank Reconciliations: Step by Step Guide

Finance Leadership

Companies across industries perform bank reconciliations to ensure the accuracy of their financial statements. By comparing internal documents with external statements, any errors or changes that need to be made can be addressed in a timely manner to complete accounting close. With advances in technology, bank reconciliation no longer has to be a time-consuming and error-prone process.

We’ll cover all this and more in this step-by-step guide on bank reconciliations.

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Coming Up

1. What is a Bank Reconciliation?

2. What is Bank Reconciliation Terminology?

3. How do you Reconcile a Bank Statement?

4. What are the Steps for Bank Reconciliation?

5. What are the Problems with Bank Reconciliations?

6. How Often Should You Reconcile Your Bank Account?

7. Why Do a Bank Reconciliation?

8. Why Use Bank Reconciliation Software?

9. Why Do Balance Sheet Reconciliations?

10. What are the Best Reconciliation Tools?

11. Features

12. What are the Steps in Financial Reconciliation?

13. Why Use Automated Reconciliations?

14. What are Best Practices for Month End Reconciliation?

15. Wrap Up

What is a Bank Reconciliation?

Bank reconciliation refers to the process of comparing financial statements to a bank statement. While it can be performed by an individual for their own finances, it’s a process that happens within almost every business.

A bank statement shows what transactions have taken place in a business’ bank account over the last month. At the same time, your business maintains its own financial records. By comparing your cash balance on your balance sheet to the amount on a bank statement, you’re able to ensure that transactions are a reflection of reality.

By conducting bank reconciliations on a regular basis, you can detect fraud and rectify mistakes quickly. However, due to the timing of transactions, the cash balance on a bank statement and within the cash balance of a balance sheet are frequently different. The use of a bank reconciliation will tell you whether or not the difference is explainable or actually indicative of an issue.

Companies have the option to conduct bank reconciliations at their own frequency, be it daily, weekly, monthly, quarterly or annually. Given the deployment of automated bank reconciliations, it becomes feasible and effective to carry out bank reconciliations more frequently.

What is Bank Reconciliation Terminology?

When dealing with bank reconciliations, it’s useful to know a few key terms that will constantly be involved in the process. These include:

Deposit in Transit

Deposit in transit refers to checks and/or cash that have been documented within the company’s ledger but have yet to be displayed in the bank in which they were deposited. When a company makes a deposit at the end of a month, it won’t immediately be reflected in the bank statement. Since this is the case, it will become a reconciling item.

NSF Check

NSF stands for “not sufficient funds.” If a check is not honored by the bank in which it was deposited, then the entity that’s trying to cash the check could be charged a processing fee.

Outstanding Check

An entity may deduct a check that’s been issued as a deduction from its cash, but it may have yet to clear in the bank account. For this reason, it won’t appear on the bank statement yet and will need to be reconciled.

How do you Reconcile a Bank Statement?

A bank statement is reconciled by comparing it to the general ledger within your business.

With each transaction, your bookkeeper, accountant, or accounting software records bank and cash transactions. The bank column displays what’s available in the bank and the cash column depicts what cash is available.

For various reasons, these two statements may not line up. Reconciling a bank statement is like performing an investigation as to where and why the statements don’t match up. In the end, every item should be accounted for and the balances should align.

What are the Steps for Bank Reconciliation?

Bank reconciliation can be performed automatically or manually. We will soon get to why an automated solution is so beneficial, but before we do, here’s the step-by-step process for bank reconciliation:

1. Compare Deposits

Take a look at the deposits on both your bank statement and within your general ledger. Make sure that your deposit amounts notated in the debit side of your cashbook are in agreement with your credit side of the bank statement. Conduct this for the opposite situation as well where the credit side of the cash statement in the bank column matches up with the debit side of the bank statement.

2. Make Adjustments - Bank Statement

For any transactions that have yet to display in your bank statement, be sure to take them into consideration. These may include deposit in transit, bank errors, and outstanding checks, for example. While bank errors rarely do happen, it is a possibility. These errors could be those of omission or entering the wrong amount.

3. Make Adjustments - Cash Account

Within your business account, you may also have to make adjustments. If you need to add interest, do so. Or, you may have to remove any bank fees or overdraft fees. Keep in mind differences like NSF checks, bank charges, and cash account mistakes.

4. Compare Balances

Once you’ve made the necessary adjustments to both the cash account and bank statement, you can check that the account balances match. If the number isn’t the same, then reconciliation isn’t over. You must go back and check the work again.

Only once the amounts are in agreement, then you can prepare your journal entries.

What are the Problems with Bank Reconciliations?

The whole purpose of bank reconciliations is to find errors or missing information. So, when you come across records that do no match, there is no reason to be alarmed. This is the entire reason why you’re performing this process in the first place.

It helps to know what to expect. Some problems with bank reconciliations that you could possible come into contact with include:

Uncleared checks:

When your business writes a check to a vendor or employee, you have no control over when they choose to clear the check. However, these residual checks will still exist as paid out amounts from your internal statements.

Within the short-term, maintain these records. If the uncleared check exists for a long time, then it may be worth contacting the payee to ensure that they received the check. It could be the case that you may have to void and reissue the check.

Voided checks:

From the above scenario, it may be the case that you’ll end up voiding the check. Whether you let the bank know or not, accounts could be affected. If you didn’t contact the bank to void the check, then you’ll have to document the check amount as a credit to the cash account.

To avoid double payment, you may also have to void the potential replacement check that may have been created.

How Often Should You Reconcile Your Bank Account?

Asking how often you should reconcile your bank account is like asking how many cups of coffee you need a day. It really depends on your situation.

When you have many transactions taking place, then it’s more necessary to conduct bank reconciliations at a higher frequency. For example, many retailers or eateries will execute the process daily.

The longer you wait to reconcile your accounts, the more time and work you’ll need to spend going through the records. No matter what choice you make for your own business needs as to the frequency of your reconciliations, it’s best to remain consistent.

Additionally, if you’re bogged down or intimidated by the amount of work it takes, then consider using an automation solution to take care of the task for you and your team!

Why Do a Bank Reconciliation?

The benefits of performing a bank reconciliation greatly outweigh any downsides. Plus, the only downsides could be the time and resources you need to perform the process. But, you can also alleviate these burdens with automation solutions and only reap the benefits of reconciliation, which include:

  • Detecting fraud early enough to reverse it
  • Tracking accounts payable and accounts receivable
  • Clearing any errors like missed payments or omissions
  • Tracking and potentially preventing bank fees or penalties

With software, the system can pull the records from various sources and match line items in no time. Your team benefits from freeing up this time to go work on valuable tasks that require human intervention.

While the reconciliation is running, they’ll either be notified of a clean completion or alerted to any anomalies that may exist for correction.

Why Use Bank Reconciliation Software?

Imagine the amount of transactions your business had yesterday, last week, or last month. Now, think about a human being having to go through your bank statement and cash book to match records manually.

Not only does this sound like a big project that will require a lot of time, but you probably also know that not many people would be very excited to do this kind of repetitive work. Reconciliation software utilises robotic process automation to carry out the reconciliation like a human being would, but without the need for any manual labor.

Bank reconciliation software saves time. By saving time, you ultimately save money. Furthermore, your team can focus on more creative tasks, which often ends up resulting in increased employee satisfaction.

Why Do Balance Sheet Reconciliations?

You’re probably aware that bank reconciliations aren’t the only reconciliations worth doing. Balance sheet reconciliations are another very important type of reconciliation to perform on a consistent basis.

Your balance sheet is an essential financial document that is involved in the closing of various accounts, including:

  • Cash
  • Accounts payable
  • Loans and debt
  • Inventory
  • Prepaid expenses
  • Accounts receivable
  • Payroll liability
  • Accrued liabilities

Balance sheet reconciliations help to maintain accurate documentation and keep up with compliance rules. You’ll always want to have an accurate understanding of your financial position because it affects your business decisions.

The advantage of balance sheet reconciliations is that you’ll always know your cash position. With the aid of automation technology, these updates happen in real-time. With software, you can get rid of the immense amount of paperwork and forget about the risk of losing important and time-sensitive information.

To streamline the process, software systems have the ability to collect data from different sources, format the data to be utilised, and execute the balance sheet reconciliation process in seconds.

With a manual or automated approach, you’ll want to complete the following list of best practices:

  • List all the accounts that need to be reconciled
  • Address what accounting principles are being applied
  • Check that data is properly recorded
  • Define your reconciliation process
  • Have a responsible party to oversee the process

What are the Best Reconciliation Tools?

There are many different reconciliation tools in the market. Once you are ready to maximise your team’s time and benefit from automated solutions, then you’ll be ready to research your options.

To reiterate, the benefits of reconciliation tools span:

  • Standardisation: At whatever frequency that you choose to execute reconciliations, you’ll want the process to run in the same manner each time. This is especially complicated when you have a spread out team and different departments involved in the transactions (which is inevitable). By using reconciliation software, the process is fully automated and therefore happens the same way each time.

  • Expedient and accurate: Because reconciliation software can pull data in seconds, you save a ton of time. Without the need for human intervention and manual spreadsheets, error reduction is also bound to occur.

  • Audit trails: Everything that occurs within the reconciliation software will be recorded and stored so it can be reviewed at a later date, if need be. This aids in regulatory compliance and also internally to review past expenditures and forecast the future.

  • Increased control: Since the process takes place within the system, stakeholders and managers can always check in on what’s happening at any point in time.
  • Accountability: The software systems are also designed such that different people in different roles can have their own access controls. By providing user controls, it helps to clarify everyone’s responsibilities and expectations.

Features

When considering the various tools, look for one that has these features:

  • Issue management
  • Classification
  • Transaction matching
  • Reporting abilities

Each organisation will be unique in what it's looking for. To provide you with an idea of some of the top tools currently available, consider learning more about SolveXia, Bank Rec, ReconArt, or Blackline.

What are the Steps in Financial Reconciliation?

Financial reconciliation is the process of looking at various financial records to make sure they are in line with one another. Since the general ledger contains all information, it’s often at the heart of financial reconciliations.

For public companies, financial reconciliations aren’t an option– they are mandatory. This regulated process calls for immense accuracy and timeliness by which automation solutions can provide.

The two general methods for conducting financial reconciliation are:

  • Documentation review: Documentation review is the process of collecting all data from financial documents and examining the existing records. Reconciliation software automatically compares these records.
  • Analytics review: Used less commonly, an analytics review consists of looking at historical data and comparing what balances are expected versus the balances that exist. If there’s a big enough difference between expectations and reality, then the need to dig deeper to determine whether or not fraud or mistakes are occurring will be required.

Financial reconciliation allows a business to detect errors (i.e. missed payments, track incoming and outgoing funds, include bank fees in its books, determine the accuracy of financial statements, and importantly, highlight and correct fraudulent activity.

The process of financial reconciliation follows these steps:

  • Comparing data across statements: Pull all required data and check your register against the bank statement.
  • Reviewing outgoing funds: Be sure to note charges, fees for ATM transactions, and take account of checks.
  • Checking incoming funds: Update your statements to reflect any deposits into your bank that have yet to show up on the statement.
  • Spotting bank errors: If you notice a bank error, contact the bank to appeal it for review and rectification.
  • Validating records: To culminate the process, balances should match up. For any discrepancies that required editing, make note of changes and updates. Don’t worry about this step if you’re using an automation software as the system will document and store all updates you make automatically.

Why Use Automated Reconciliations?

Throughout this step-by-step guide, we’ve continued to touch on the benefits of using an automation solution to conduct reconciliations.

Simply by outlining the pitfalls of manually performing reconciliations, it becomes very clear why using an automation tool is a best practice.

Manual reconciliations can cause many challenges and problems within a business environment. It’s not to say that it’s impossible to make work, but in more cases than not, there will be issues involved. This includes:

  • Wasted time
  • Lack of accountability due to the many steps and people involved
  • High opportunity costs
  • The need for micromanagement and check-ins
  • Compliance risk
  • Inability for standardisation
  • Miscommunication about where the process currently stands

When you introduce a tool to automate reconciliations, your business is able to: streamline the process, prevent the need for key person dependencies, standardise the reconciliation process, save time, minimise errors, prevent and/or reduce fraud, boost employee satisfaction, provide transparency, and increase an organisation’s confidence in its financial records.

What are Best Practices for Month End Reconciliation?

The month-end close process relies on reviewing accounting steps and reconciling accounts. Before being able to close books for that accounting period, this information must be made available for review.

The complexity of the process depends on the amount of transactions and records your team has to review. In most cases, it’ll involve data like: inventory totals, total fixed assets, balance sheets, revenue totals, and more.

Not only must you consider the immense amount of data involved, but you must also be aware of timing differences that can affect the process. People across departments or within the same department may be involved in having to complete their own tasks before the sequential step can occur.

The multiple hands involved, as well as the necessity for complete and accurate data, can add to the challenge.

To overcome these hurdles, automation tools can play a major role. With a tool, you can reconcile accounts that are at high-risk for errors daily to avoid the domino effect of mistakes from snowballing out of control.

Automation tools will carry out flux analysis (fluctuation analysis) for you so you can spot mistakes in real-time. While this variance analysis may be conducted manually, by the time you recognise the difference between actuals and expected amounts, it may be too late to resolve them.

With a tool like SolveXia, you’ll be able to complete this process without ever running the risk of missing a deadline. Automation ensures the accuracy of data so you can prevent sharing any financial statements with errors.

Lastly, by closing your books on time, you’ll never miss a tax filing. You’ll also always have a clear view on your business’ financial health and can easily pull audits for internal or external review.

Wrap Up

From bank reconciliations to balance sheet reconciliations, the various types of financial reconciliations are not going anywhere any time soon. In fact, with more data and transactions occurring digitally, the need for accurate and real-time updates is even more necessary.

To overcome bank reconciliation problems, you can utilise automation solutions to carry out the process for your business any time you wish to run it.