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What is a bank reconciliation?
Bank reconciliation is the process of comparing a company’s internal financial records with those of its bank account to ensure they match. This helps identify discrepancies such as missing payments, errors in the bank’s records, or mistakes in the company’s accounting. Essentially, it’s a way to confirm that the balance on your company’s books is in harmony with what the bank says you have.
Imagine this: You’re about to write a check for a new project, but when you look at your account balance, it seems off. You know you’ve had several expenses recently, but some payments haven’t appeared in your records yet. By reconciling your bank account, you can figure out exactly where those differences come from, ensuring that your balance is accurate before making any decisions.
Why is this important? Accurate bank reconciliation helps prevent fraud, spot errors, and avoid any surprises in your finances. It gives business owners a clearer picture of their financial health, which is crucial for making informed decisions.
How to do a bank reconciliation?
While bank reconciliation can seem daunting at first, it’s a manageable process once you break it down into steps. Here’s a simple guide to help you get started:
- Gather Your Documents: You’ll need your bank statement and your company’s accounting records, whether that’s from a spreadsheet or accounting software. Ensure you have the full bank statement for the period you’re reconciling.
- Compare the Records: Start by checking your company’s ledger against the bank statement. Look at the transactions and make sure everything matches up. For example, if your accounting software shows a deposit of $500 on January 5th, verify that the same deposit appears on your bank statement for the same date.
- Identify Discrepancies: Any differences between the two records need to be investigated. Common discrepancies include outstanding checks (checks you’ve written but the bank hasn’t processed yet) or deposits that haven’t cleared. Make a note of these.
- Adjust Your Books: Once you’ve identified the discrepancies, you’ll need to adjust your accounting records accordingly. This could mean adding missed transactions or correcting any errors in your records. It’s also helpful to ensure any bank fees or charges are reflected in your books if you missed them earlier.
- Reconcile the Balances: After making the necessary adjustments, your accounting records should match the bank statement. If they do, you’ve successfully completed the reconciliation. If not, go back and double-check your work until everything aligns.
It’s worth noting that depending on the size of your business and the volume of transactions, bank reconciliations can take anywhere from a few minutes to a couple of hours. But even for small businesses, consistency in reconciling is key. Some businesses set a routine to reconcile every week, while others prefer to do it monthly. Whichever method works best for you, it’s important to stay on top of it.
Bank reconciliation example
Let’s take a quick example to show how this works in action:
Imagine your company’s ledger shows an ending balance of $4,000 for the month of February. You get your bank statement and see a balance of $3,800, which immediately raises a flag. Upon reviewing the statement, you notice that the bank has processed a check for $500 that you issued but forgot to record in your books. In addition, you spot a $50 bank fee that’s missing from your ledger.
So, what do you do?
- Adjust your company’s ledger to reflect the $500 check and the $50 bank fee. Now your books are updated to match the bank statement.
- After these adjustments, the balances should match, confirming the reconciliation is complete.
This is a simple example, but as businesses grow, the process becomes more complex. That’s why regular reconciliations are so important. They allow you to catch any errors before they become bigger problems.
Learn more
What is a bank reconciliation?
Bank reconciliation is the process of comparing a company’s internal financial records with those of its bank account to ensure they match. This helps identify discrepancies such as missing payments, errors in the bank’s records, or mistakes in the company’s accounting. Essentially, it’s a way to confirm that the balance on your company’s books is in harmony with what the bank says you have.
Imagine this: You’re about to write a check for a new project, but when you look at your account balance, it seems off. You know you’ve had several expenses recently, but some payments haven’t appeared in your records yet. By reconciling your bank account, you can figure out exactly where those differences come from, ensuring that your balance is accurate before making any decisions.
Why is this important? Accurate bank reconciliation helps prevent fraud, spot errors, and avoid any surprises in your finances. It gives business owners a clearer picture of their financial health, which is crucial for making informed decisions.
How to do a bank reconciliation?
While bank reconciliation can seem daunting at first, it’s a manageable process once you break it down into steps. Here’s a simple guide to help you get started:
- Gather Your Documents: You’ll need your bank statement and your company’s accounting records, whether that’s from a spreadsheet or accounting software. Ensure you have the full bank statement for the period you’re reconciling.
- Compare the Records: Start by checking your company’s ledger against the bank statement. Look at the transactions and make sure everything matches up. For example, if your accounting software shows a deposit of $500 on January 5th, verify that the same deposit appears on your bank statement for the same date.
- Identify Discrepancies: Any differences between the two records need to be investigated. Common discrepancies include outstanding checks (checks you’ve written but the bank hasn’t processed yet) or deposits that haven’t cleared. Make a note of these.
- Adjust Your Books: Once you’ve identified the discrepancies, you’ll need to adjust your accounting records accordingly. This could mean adding missed transactions or correcting any errors in your records. It’s also helpful to ensure any bank fees or charges are reflected in your books if you missed them earlier.
- Reconcile the Balances: After making the necessary adjustments, your accounting records should match the bank statement. If they do, you’ve successfully completed the reconciliation. If not, go back and double-check your work until everything aligns.
It’s worth noting that depending on the size of your business and the volume of transactions, bank reconciliations can take anywhere from a few minutes to a couple of hours. But even for small businesses, consistency in reconciling is key. Some businesses set a routine to reconcile every week, while others prefer to do it monthly. Whichever method works best for you, it’s important to stay on top of it.
Bank reconciliation example
Let’s take a quick example to show how this works in action:
Imagine your company’s ledger shows an ending balance of $4,000 for the month of February. You get your bank statement and see a balance of $3,800, which immediately raises a flag. Upon reviewing the statement, you notice that the bank has processed a check for $500 that you issued but forgot to record in your books. In addition, you spot a $50 bank fee that’s missing from your ledger.
So, what do you do?
- Adjust your company’s ledger to reflect the $500 check and the $50 bank fee. Now your books are updated to match the bank statement.
- After these adjustments, the balances should match, confirming the reconciliation is complete.
This is a simple example, but as businesses grow, the process becomes more complex. That’s why regular reconciliations are so important. They allow you to catch any errors before they become bigger problems.
