What is Bank Statement Reconciliation: Ultimate Guide

In theory, the money in your business bank account should match up with the balance on your company’s internal records. But, that’s not always the case, and in some instances, it’s understandable why there are differences.

Bank statement reconciliation is a necessary process to keep your finances on track and know where your business stands.

We’re going to share the account reconciliation process steps, the benefits of reconciliation, and review how automation can be a savior along the way.

Coming Up

What is Bank Statement Reconciliation?

How to Understand the Bank Statement Reconciliation?

Why is Bank Statement Reconciliation Important?

What are the Benefits of Bank Statement Reconciliation?

What is the Best Bank Statement Reconciliation Tip?

What are Common Bank Statement Reconciliation Questions?

What are Common Problems with Bank Statement Reconciliation?

How to Perform a Bank Statement Reconciliation?

What are the Steps in a Bank Statement Reconciliation?

How to Adjust Balance per the Books?

How Often Should You Perform Bank Statement Reconciliation?

Closing Words

What is Bank Statement Reconciliation?

Bank statement reconciliation compares the cash balance on your balance sheet with the balance reflected by your bank statement. In an ideal world, these numbers would match up. Yet, it’s hard for the numbers to always be the same at the same time because of timing delays and explainable differences.

Bank reconciliations help to make sure that payments are processed and that cash has been properly deposited into your bank account. Additionally, it accounts for bank fees.

How to Understand the Bank Statement Reconciliation?

Bank reconciliation records are often known as bank reconciliation statements. Every bank reconciliation statement will include two documents:

• Bank statements for the company account(s) being reconciled
• Corresponding company account ledgers

The accounts reconciliation process’ steps include matching each entry of a cash deposit or expenditure noted in the company’s account ledger to a corresponding transaction that should appear on the monthly bank statement.

So, for example, a company that took in $20,000 in revenue, but spent $5,000 on rent and $5,000 more on employee expenses, should have those transactions noted in the both company ledger and the bank statements, which would then show a balance of $10,000.

But sometimes, bank statements and company account ledgers don’t match. That’s when the accounting staff needs to conduct further research to account for that discrepancy. In some instances, the discrepancies may be explainable (i.e. a timing delay), whereas in others, it will indicate something malicious like fraud or an honest mistake.

A bank reconciliation statement will account for the discrepancy and how it was corrected. For example, a $25 shortfall due to auto-debited monthly account fees would leave the bank account statement $25 less than the ledger. So, the accounting staff would debit the company ledger by $25 to balance the statements.

Why is Bank Statement Reconciliation Important?

Performing the bank statement reconciliation process adds a lot of value to any business. Along with being a critical part of the month-end close process, it helps to spot fraud and any errors before they grow too large to remedy.

It’s best practice to perform a bank reconciliation at least as often as a bank statement is generated. Typically, this happens at least once a month. If you’re operating a business that has a high volume of transactions or is working with multiple payment processors, the necessity for more regulary bank reconciliations like weekly or even daily is even greater.

That being said, manually cross-checking and collecting data becomes way too time consuming and error-prone. Thats why leading finance teams are choosing finance automation software to streamline and automate the bank reconciliation process so finance teams can focus their time on high-level and value-add tasks.

What are the Benefits of Bank Statement Reconciliation?

Bank statement reconciliation is a process that helps to make sure that your finances are in order and as expected based on the data you have recorded in your general ledger.

Besides spotting fraud early on and placing a spotlight on any suspicious activity, bank reconciliation statements are performed to find any errors. This way, businesses can rectify any mistakes before finalizing financial reporting.

For publicly traded companies, it’s of utmost importance for financial reporting and statements to be 100% accurate in order to limit any compliance risk. For private businesses, the same need still stands to make informed business decisions.

Bank statement reconciliation is also executed so that businesses are sure to pay the right amount in taxes. As you can see, the circumstances and connected activities to the bank reconciliation process are all of primary importance.

What is the Best Bank Statement Reconciliation Tip?

Among all the things you can do to spruce up your bank reconciliation process, there’s one tip that can help resolve most of the challenges that come along with the tedious task. It is to use technology to serve you!

Finance automation software is able to collect and centralize your data, cross-match your records, and notify your team if any exceptions arise so that you can investigate and fix them in a timely manner. Automation software makes it easy to meet all your important deadlines.

What are Common Bank Statement Reconciliation Questions?

As your team performs the bank reconciliation process, common questions arise. Here are the answers so that everyone can know what to expect and how to proceed when they run into exceptions:

1. How do entire transactions go missing?

It’s possible that there’s lag time between a transaction taking place and it showing up in your bank account. Timing delays are common, so be sure to take them into consideration during your general ledger reconciliation.

2. Does every record have to match exactly between my bank statement and general ledger?

Sometimes, transactions may not be processed through your business’ bank account. If that’s the case, make note of it.

3. How often should I perform bank reconciliation?

The frequency is ultimately up to you, but it’s necessary to perform before tax filing. This may be monthly or annually. However, if you’re a high volume transaction business, it’s best to perform bank reconciliation much more frequently, as in daily, weekly, or at the very least, monthly.

What are Common Problems with Bank Statement Reconciliation?

As mentioned, the bank reconciliation process isn’t always all buttoned up. There are some circumstances that are entirely normal and expected, so in certain situations, the mismatches aren’t actually something to be too worried about.

However, you still have to know what’s happening so you can ensure that everyone is on the same page.

These common problems include:

1. Cash-in-Transit

Deposits and in-transit checks don’t always show up immediately on bank statements. The business has recorded the money’s movement, but the bank is still processing it.

2. Outstanding Checks

If your business issues a check, but it doesn’t get deposited right away, then it will show as outgoing on your general ledger but not in your bank. Be sure to carry the check balance to the next month and keep track of doing so for this month’s obligations.

3. Bank Fees

Another common problem is that bank fees need to be accounted for once money has been moved. For example, overdraft fees and non-sufficient funds (check bounces) can throw off your balances.

How to Perform a Bank Statement Reconciliation?

When you’re ready to perform a bank statement reconciliation, here are the must-have steps:

1. Collect Data

Get access to all your data, including the bank statements and internal ledger. If you’re operating with spreadsheets, this creates challenges. Alternatively, finance automation software will connect all your data across all your systems and tools through APIs, thereby saving you time and increasing accuracy.

2. Match Transactions

Cross-check your transactions line-by-line. Or, leverage a finance automation tool to do it for you so that you don’t have to waste time with the tedious process!

3. Make Adjustments

Should any adjustments be necessary to correct balances, make the updates (i.e. correct bank errors, note any deposits in transit, or deduct outstanding checks from the bank balance). Be sure to also make updates to the cash account.

4. Compare Balances

By the end of these steps, your balances should match up. If not, repeat the reconciliation process.

What are the Steps in a Bank Statement Reconciliation?

Each company may have some mild differences in how bank reconciliations are done, but the broad strokes of the process are similar at every company.

The basic steps in a bank reconciliation are as follows:

1. Collect bank statements and company account ledgers for the period since the last reconciliation.

2. Match the deposits and withdrawals from the bank statement to the company account ledger.

3. Take note of any mismatched balances or unrecorded transactions.

4. Research the reason for the mismatched balance or transaction

5. Adjust the out of balance account accordingly (e.g. debit the bank account statement or company account ledger as needed)

6. Compare the final balances of both statements
   

If the bank reconciliation has been performed properly, the final balance of both statements should match. If they don’t match, there is still a transaction on the company account ledger that is not accounted for in the bank statement or vice versa.

At that point it will be necessary to start from the beginning and repeat the process until the discrepancy is discovered, and accounted for.

How to Adjust Balance per the Books?

In order to make the account balances match between bank statements and the cash account, you may have to update your books. This is the case when there are bank fees or interest earned.

Interest will automatically be added to your bank account, so be sure to reflect the same in your internal ledger.

How Often Should You Perform Bank Statement Reconciliation?

Bank statement reconciliation doesn’t have to be a dreaded experience given that automation software can streamline it so your team doesn’t have to be bogged down. That being said, it’s best to reconcile your bank statements every time you receive them. Usually, that means monthly.

As reiterated throughout, the more transaction volume that your business deals with, the bigger the need for more frequent reconciliation. When you automate the process, it’s simple to execute on even a daily basis as it takes just minutes instead of days.

Closing Words

The bank reconciliation process isn’t something to skip by or procrastinate. As your finance team deals with many responsibilities, finance automation software can be a saving grace to free up their time rather than having to manage time-consuming and error-prone reconciliation tasks.

By consistently executing bank statement reconciliation, you can ensure your financial statements and accounts are accurate, reduce and prevent fraud, and make informed business decisions.