5 Bank Reconciliation Steps

Want to learn the bank reconciliation steps professional use?

Read on.

What are the bank reconciliation steps?

1. Gather Necessary Documents

Before diving into the bank reconciliation process, it’s crucial to gather all the required documents.

This step lays the foundation for a smooth and accurate reconciliation.

The two key documents you’ll need are:

• Bank statement: This is the monthly report provided by your bank, detailing all the transactions that occurred in your account during the statement period. It includes deposits, withdrawals, checks, fees, and any other activity. Make sure you have the most recent statement that covers the period you want to reconcile.
• Company’s accounting records: These are your internal financial records, primarily the cash book and general ledger. The cash book, also known as the cash account or cash receipts and disbursements journal, is where you record all cash inflows and outflows. The general ledger is your master accounting record, containing all financial transactions across various accounts.

2. Compare Opening Balances

With your bank statement and company records in hand, you’re ready to begin the reconciliation process.

The first step is to compare the opening balances on both documents.

Verify Starting Balance on Bank Statement Matches Company Records

Locate the opening balance on your bank statement.

This is the amount of money in your account at the beginning of the statement period.

Now, find the corresponding opening balance in your cash book or general ledger.

These two figures should match.

If you’ve been regularly reconciling your accounts, the opening balance on your current statement should be the same as the ending balance from your previous reconciliation.

This continuity is important for maintaining accurate records.

Identify and Resolve Any Discrepancies in Opening Balances

If the opening balances don’t align, you’ll need to investigate the discrepancy.

Some common reasons for mismatches include:

• Timing differences: Transactions may be recorded in your company’s books before they clear the bank, or vice versa. This can lead to temporary discrepancies.
• Errors: Mistakes can happen on either end, whether it’s a typo in your records or an error on the bank’s part.
• Omissions: A transaction may have been accidentally omitted from your records or the bank statement.

To resolve discrepancies, go through your records and the previous bank statement to identify any transactions that could explain the difference.

If you find an error in your company’s records, make the necessary adjustments.

If you believe the bank has made an error, contact them to discuss the issue and request a correction.

3. Review and Match Transactions

With the opening balances verified, it’s time to dive into the heart of the bank reconciliation process: reviewing and matching transactions.

This step involves meticulously comparing each transaction on your bank statement to those recorded in your company’s books.

Compare Each Transaction on Bank Statement to Company Records

Start by going through your bank statement line by line.

For each transaction, look for a corresponding entry in your cash book or general ledger.

This process can be tedious, but it’s essential for identifying any discrepancies or missing transactions.As you review each item, consider the following:

• Transaction amount: Does the amount on the bank statement match what’s recorded in your books?
• Transaction date: Is the date of the transaction consistent between the bank statement and your records?
• Transaction description: Does the description of the transaction on the bank statement align with what’s noted in your books?

Mark Matching Transactions in Both Records

When you find a transaction that matches between the bank statement and your company records, mark it as reconciled in both places.

This can be done by placing a checkmark, highlighting the entry, or using your accounting software’s reconciliation feature.Marking matched transactions helps you keep track of your progress and ensures you don’t double-count any entries.

Note Any Unmatched or Missing Transactions

As you work through the reconciliation, you may come across transactions that don’t have a match in either the bank statement or your company records.

These unmatched or missing transactions can fall into a few categories:

1. Deposits in transit: These are deposits recorded in your books but not yet reflected on the bank statement. They typically occur when you make a deposit near the end of the statement period, and it hasn’t cleared the bank yet.
2. Outstanding checks: These are checks you’ve issued and recorded in your books, but they haven’t been cashed by the recipient or processed by the bank.
3. Bank errors: Occasionally, the bank may make a mistake, such as duplicating a transaction or omitting one altogether.

Make a list of any unmatched or missing transactions you discover.

You’ll need this information to reconcile your accounts in the next steps.

4. Adjust Bank Statement Balance

Once you have reviewed and matched all transactions between the bank statement and your company’s accounting records, it’s time to adjust the bank statement balance.

To begin, add any deposits in transit to the bank statement balance.

These are funds that have been recorded in your cash book but have not yet cleared the bank.

This may include checks received from customers or cash deposits made at the end of the month that will appear on the next month’s bank statement.

Next, subtract any outstanding checks from the bank statement balance.

Outstanding checks are those that have been written and recorded in your cash book but have not yet been presented to the bank for payment.

Finally, correct any bank errors that you discovered during the reconciliation process.

These may include incorrect deposits, wrong amounts debited or credited, or even transactions posted to the wrong account.

Contact your bank to resolve these issues and ensure that the necessary corrections are made on both the bank statement and in your company’s records.

5. Adjust Cash Book Balance

After reconciling the bank statement, it’s crucial to update the company’s internal financial records to reflect any necessary adjustments.

This step ensures that the cash book balance aligns with the adjusted bank statement balance, providing an accurate picture of the company’s cash position.

To continue, carefully review the bank statement for any bank fees, penalties, or interest income that may not have been recorded in the company’s accounting system.

These items should be added to the cash book to ensure a complete and accurate record of all transactions.

• Record bank fees and penalties: Identify any charges imposed by the bank, such as monthly maintenance fees, overdraft fees, or wire transfer fees. Create journal entries in the company’s accounting system to record these expenses, debiting the appropriate expense account and crediting the cash account.
• Add interest income: If the bank account earns interest, locate the interest income on the bank statement and record it in the company’s financial records. Create a journal entry debiting the cash account and crediting the interest income account.
• Correct any errors in company records: During the reconciliation process, you may have identified errors or omissions in the company’s internal records. These could include transactions that were recorded incorrectly or not recorded at all. Make the necessary adjustments to the cash book by creating correcting journal entries, ensuring that the debits and credits are equal.

Prepare the Final Bank Reconciliation Report