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In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary. However, small business owners and bookkeepers need to remember that yes, banks do make mistakes, and one of the best ways to find those mistakes is by reconciling all of your bank accounts monthly.
Completing a bank reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records. The process can help you correct errors, locate missing funds, and identify fraudulent activity.
It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely. However, connecting your accounting software to your bank or financial institute does not take the place of doing a month-end bank reconciliation.
In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one.
A bank reconciliation helps ensure that your ending bank statement and your general ledger account are in balance.
Remember, your cash or bank accounts in your general ledger should reflect the same activity that is on your bank statement. If it doesn’t, you need to determine what’s missing. Figure out if it’s missing from the bank statement balance or the general ledger balance, and then reconcile the two numbers.
Most business owners receive a bank statement, either online or in the mail, at the end of the month. Most business accounts are set up to run monthly, though some older accounts may have a mid-month end date.
If that’s the case, the statement can still be reconciled, you’ll just have to run a general ledger report ending on the same day as the bank statement. For instance, if your bank statement period is 1/11/2020 through 2/10/2020, you would run a general ledger or trial balance for that same period.
Fortunately, many accounting software applications include a bank reconciliation template or form in the application, which allows you to easily reconcile any of your bank accounts that are connected to your software.
However, for those preferring to not connect their bank accounts to their software, or for any business using software that doesn’t offer a connectivity option, here are the steps to follow in order to reconcile all of your bank accounts.
Your bank reconciliation form can be as simple or as detailed as you like. Below is a good example of a simple reconciliation form. For example, your bank statement shows that your ending balance is $11,450, while your G/L balance according to your trial balance is $10,850.
The goal is to get your ending bank balance and ending G/L balance to match.
Bank Balance | G/L Balance | |
---|---|---|
Ending Balance as of 1/31/2020 | $11,450 | $10,850 |
Ending Balance |
Tips for preparing your reconciliation form
While completing a bank reconciliation is not difficult, it does require that you pay attention to detail. Pay particularly close attention to the following:
If you commonly make deposits into your account, you’ll want to compare your bank account deposit totals to those listed in your general ledger. Remember, banks make mistakes, too, with transposition errors common. Be sure all of your bank deposits match.
Tips for verifying bank deposits
This is an important step. For instance, what happens if you have a deposit in the amount of $850 that is recorded properly in the G/L, but the bank leaves off the zero, recording the deposit as $85 instead?
That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days. This is probably the most important step in the entire bank reconciliation process.
It’s common for your bank statement to have a higher ending balance than your G/L account shows. While it may be tempting to assume you have more money in the bank than you think, it’s a safe bet that the difference is checks and other payments made that have not yet hit the bank.
The easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank. Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column.
For instance, you paid two vendors by check on January 31. Those payments are recorded in your G/L, but they have yet to hit the bank. You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t cleared.
Bank Balance | G/L Balance | |
---|---|---|
Ending Balance as of 1/31/2020 | $11,450 | $10,850 |
Check # 2100 | ( $400) | |
Check # 2101 | ( $425) | |
Ending Balance |
Tips for finding outstanding checks
When you're completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks.
Notice that the bank reconciliation form above still does not balance, even after including the outstanding checks. This means the bank has made an adjustment to your account that has not been recorded in your G/L.
These items are typically service fees, overdraft fees, and interest income. You'll need to account for these fees in your G/L in order to complete the reconciliation process.
Tips for finding G/L adjustments
The easiest way to find these adjustments when completing a bank reconciliation is to look at the bank fees. You’ll also want to look at any miscellaneous deposits that haven’t been accounted for. Once you locate these items, you'll need to adjust your G/L balance to reflect them.
For instance, the bank charged your business $30 in service fees, but it also paid you $5 in interest. Below is an example of a completed bank reconciliation statement.
Bank Balance | G/L Balance | |
---|---|---|
Ending Balance as of 1/31/2020 | $11,450 | $10,850 |
Check # 2100 | ( $400) | |
Check # 2101 | ( $225) | |
Bank Fees | ( $30) | |
Interest Income | $ 5 | |
Ending Balance | $10,825 | $10,825 |
The final step in the bank reconciliation process is to record journal entries to complete the balancing process.
Date | Account | Debit | Credit |
---|---|---|---|
1/31/2020 | Cash | $5 | |
1/31/2020 | Interest Income | $5 | |
1/31/2020 | Bank Fees | $30 | |
1/31/2020 | Cash | $30 |
You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee.
Tips for creating journal entries
Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there. However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded.
Any accounts that are active should be reconciled at month end, even if there are only a few transactions.
If you’ve entered adjustments for both your bank balance and your GL balance, and there is still a bank reconciliation problem, you will need to continue to review both your bank statement and your G/L to locate the missing item.
This may require going back several months in order to find the issue, which is why reconciling each month is so important.
If you’re doing a bank reconciliation for the first time, it can be helpful to look at a bank reconciliation example to ensure that you’re doing it properly.
Among the various accounting terms and processes you need to understand, such as preparing a budget or tracking business expenses, perhaps one of the most important is completing the bank reconciliation process for all of your active bank accounts.
Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits. Don’t underestimate the importance of this very important tool.
If you’re interested in automating the bank reconciliation process, be sure to check out some accounting software options.
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