How to do a bank reconciliation: bank reconciliation step-by-step guide

What is the purpose of a bank reconciliation? 

Bank reconciliation involves comparing your company’s books with the company bank account to make sure that every transaction is accounted for and there are no discrepancies between the two. This includes the opening and closing balance, along with any individual transactions. In simple terms, it’s a way to verify your accounting figures and check your bookkeeping.

The purpose of keeping on top of bank reconciliation is to keep records as accurate as possible and identify any fraudulent transactions. It also helps to give you a consistently clear picture of your company finances, reducing the possibility of overspend or miscalculation.

Although there are a number of reasons why discrepancies may occur, and it can often be down to simple human error, they can also be a sign of fraud and should always be taken seriously and thoroughly investigated.

The more swiftly any possible fraud can be identified, the sooner it can be stopped and the potential damage minimised. This means that for some larger companies, it is necessary to carry out bank reconciliation on a daily basis, while for smaller companies it may only be necessary to complete it at the end of each month.

Most businesses will reconcile their bank accounts at least once a month. This is usually done just after the end of the month once a monthly statement from the bank has been received. 

However, for companies with a greater risk of potential fraud, bank reconciliations can be carried out more frequently. 

How to do a bank reconciliation  

If you’re looking into bank reconciliation for the first time, here are the steps you need to keep in mind to make the process work for your business.

1. Choose your method for reconciliation
 

Your chosen method of bank reconciliation will depend on how you choose to do your company’s accounting more broadly. You might take the traditional approach of a paper chequebook and a balance book that you closely monitor and keep up to date, or a spreadsheet into which you manually enter data – and there is nothing wrong with either of these approaches, as long as all the relevant documentation is handled securely. Hard copies of transactions also help to reconcile the account in the event of any errors.

However, an increasing number of businesses have been turning to accounting software and apps in recent years, and there is specially designed automated bank reconciliation software that can help to smooth the whole process. Integrating these technologies into your accounting will completely change the way you work, but it can both save time and reduce errors.

2. Compare deposits
 

Firstly, you should look at your company records and compare them to your most recent bank statement, checking that all deposits listed on the statement are also in the company record. If not, they should be added and the balance updated accordingly.

Repeat this process the other way around, checking that all deposits listed on the company records also appear on the bank statement. If any are missing, this needs to be investigated with the bank. You might choose to set up banking alerts in future so that you are notified by email or text each time a deposit appears in the company bank account.

3. Compare withdrawals
 

Now undertake the same process again, both ways around - focussing on withdrawals rather than deposits. Is there a transaction missing from your company record or bank statement?

As with deposits, if the transaction is missing from the company record it can simply be added in and the balance updated, but if it’s absent from the bank account this needs to be looked into further. It may simply be that a cheque has not yet been cashed.

4. Look for bank adjustments
 

If transactions are missing from your company records, this may be because of bank adjustments. You may have been subject to fees such as overdraft charges.

It may also be that the account has earned interest over the most recent financial period. Either way, the records need to be corrected and the balance adjusted accordingly.

5. Adjust the cash balance
 

When adjusting your records to reflect any missing transactions that have been added, you need to make sure that all charges and deposits are accounted for in the company cash account.

Unexpected charges and fees are less likely to happen the more often you reconcile your account, because you will have a clearer and more up-to-date picture of exactly what the company can spend.

6. Compare the end balances
 

Once you have completed the reconciliation process on both sides, it’s important to double check that you haven’t missed anything by comparing the end balances in both the company record and the bank account, and confirming that they are the same.

If they are not the same, you need to repeat the reconciliation process to identify any errors that you have missed.

What are the benefits of reconciling bank accounts?

Not only is bank reconciliation a straightforward procedure if you follow the above steps, but there are several benefits that it will bring to your business – alongside streamlining the accounting process.

• It identifies fraudulent activity. As mentioned above, human error can occur at any point in the accounting process - but a discrepancy may be a sign that an unauthorised person has been making withdrawals from the company account.
• It helps to prevent mistakes. Mistakes can range from double payments or missed payments to misplaced cheques - but whatever they are, bank reconciliation can help to reduce them, especially if you automate the process. Find out more about the benefits of finance automation.
• It keeps the account in good standing. The closer an eye you can keep on the company’s account balance, the less likely you are to overdraw or miss a payment, helping you to avoid incurring fees and keeping your credit score where it should be.
• It helps with receivables tracking. With bank reconciliation, you are much more likely to notice if your own accounts record payments from a customer but your bank account does not show them. This can then be investigated quickly and efficiently.

 At AccountsIQ, we can help you to move to automation in all aspects of your accounting, including bank reconciliation. Visit our website to learn how to integrate accounting systems into your finance processes.