Bank reconciliation is the process of comparing your bank statement with your own records to ensure that they match. It's an important step in managing your finances, ensuring cash flow and detecting any discrepancies or errors. This article will provide an overview of bank reconciliation and a quick guide to get you started.
What is a bank reconciliation? Bank reconciliation definition
So, what are bank reconciliations?
Bank reconciliation is the process of comparing your bank statement with your own records to ensure that they match. The purpose of bank reconciliation involves identifying and correcting any discrepancies between the two sets of records.
The goal is to ensure that your financial records are accurate and up-to-date, which is crucial for effective financial management.
What is a bank reconciliation statement?
Another common question is, what is reconciling your bank statement?
The bank reconciliation process compares your bank statement with your own records to ensure that they match. The purpose of bank reconciliation is to identify and correct any discrepancies between the two sets of records.
The goal is to ensure that your financial records are accurate and up-to-date, which is crucial for effective financial management.
Bank reconciliation process: How bank reconciliation works
Bank reconciliation is the process of comparing your bank statement with your own records to ensure that they match. The steps below lay out the the normal process for how bank reconciliation works:
Gather your accounting records
This includes your bank account balance statement, cash balances, check register, and any other relevant financial documents. It's important to have all of your records organized and up-to-date before you begin the reconciliation process. This will help you to identify any discrepancies more easily.
Compare your bank statement to your records
Look for any discrepancies between the two, such as missing deposits, unauthorized withdrawals, or incorrect charges. This step is crucial for ensuring that your records are accurate and that you are not missing any transactions.
Investigate any discrepancies
If you find any discrepancies in your accounting records, it's important to investigate them as soon as possible. Contact your bank or the merchant involved to resolve the issue. This may involve providing additional documentation or filing a dispute.
Record any necessary adjustments
Once you have resolved any discrepancies, you need to record the necessary adjustments to your records. This will help you to keep track of your finances and ensure that your records are up-to-date.
Finalise your reconciliation
Once you have resolved all discrepancies and recorded any necessary adjustments, you can finalize your reconciliation. This involves marking your bank statement as reconciled. This will help you to keep track of your progress and ensure that you are not missing any transactions.
3 bank reconciliation examples
The following examples show how correct bank record reconciliation can help a business and the risks reconciling a checking account can help avoid.
Example 1: Missing deposit
A business deposits a check for $1,000 into their online banking account. However, when they reconcile their bank statement, they notice that the deposit is not listed.
The business investigates and discovers that the check was processed by the bank, but it was not credited to their account. They contact the bank and provide a copy of the deposit slip. The bank corrects the bank error and credits the $1,000 to the business's account.
Example 2: Unauthorised withdrawal
A business reconciles their book balances and bank statements and notices a withdrawal for $500 that they do not recognize. They investigate and discover that the withdrawal was made by a fraudulent charge on their credit card.
The business contacts their credit card company and disputes the charge. The credit card company investigates and determines that the charge was fraudulent. They credit the $500 back to the business's account.
Example 3: Incorrect charge
A business reconciles their bank statement and notices a charge for $100 from a vendor that they do not recognize. They investigate and discover that the charge was for a product that they never ordered.
The business contacts the vendor and disputes the charge. The vendor investigates and determines that the charge was made in error. They credit the $100 back to the business's account.
5 types of bank account reconciliation
There are a range of different types of bank account reconciliation, depending on sector, company financial structure, and business type, but five of the most common include:
Periodic bank reconciliation
Periodic bank reconciliation is the process of comparing your bank statement with your own records on a regular basis, such as monthly or quarterly. It involves identifying and correcting any discrepancies between the two sets of records to ensure that your financial records are accurate and up-to-date.
Continuous bank reconciliation
By contrast continuous bank reconciliation involves reconciling your bank statement with your own records on an ongoing basis, rather than waiting until the end of the month or quarter. This approach allows you to identify and correct any discrepancies or errors more quickly, which can help you to stay on top of your finances and avoid potential problems.
Intercompany bank reconciliation
Intercompany bank reconciliation compares the bank accounts of two or more related companies to ensure that they are in agreement. This is important to ensure that all inter-company transactions are recorded correctly and that there are no discrepancies between the companies' financial records.
Fixed asset bank reconciliation
Fixed asset bank reconciliation compares the fixed assets listed on a company's balance sheet with the records of the bank or other financial institution that holds the assets. This process is important for ensuring that the company's financial records are accurate and that all fixed assets are properly accounted for.
Accounts receivable bank reconciliation
Accounts receivable, or AR, bank reconciliation is the process of comparing the records of a company's accounts receivable department with the bank statements to ensure that all payments received from customers have been recorded and deposited correctly. It also helps to identify any discrepancies between the two sets of records and ensures that the company's financial records are accurate and up-to-date.
Why is reconciliation important?
Bank reconciliation is crucial for maintaining accurate and up-to-date financial records. It helps track income and expenses effectively, identifies errors or discrepancies, and facilitates the preparation of accurate financial statements.
Additionally, bank reconciliation assists in detecting fraudulent activities like unauthorized withdrawals or deposits, safeguarding money and businesses.
It is often required by financial regulations to ensure accurate reporting of financial information. Finally, bank reconciliation provides peace of mind by confirming the accuracy of financial records and preventing missed transactions.
Manual bank reconciliation vs automated bank reconciliation
Traditionally, the process of bank reconciliation was done manually, requiring a significant amount of time and effort. However, with the advent of technology, automated bank reconciliation has become increasingly popular.
In this section, we will explore the differences between manual and automated bank reconciliation, including their advantages and disadvantages.
Manual bank reconciliation
Manual bank reconciliation involves comparing your bank statement with your own records manually, typically using a spreadsheet or accounting software.
Manual bank reconciliation can be time-consuming and error-prone, especially for businesses with a high volume of transactions. However, it can be a cost-effective option for small businesses with limited resources.
- Pros:
- Gives you more control over the reconciliation process
- Allows you to customize the reconciliation process to your specific needs
- Can be less expensive than automated bank reconciliation
- Cons:
- Can be time-consuming and prone to human errors
- Requires a high level of accounting knowledge
- Can be difficult to keep up with on a regular basis
Automated bank reconciliation
Automated bank reconciliation uses software to compare your bank deposit statement with your own records, identify discrepancies, and record necessary adjustments. It is more accurate than manual reconciliation, however, it does come with a cost consideration.
- Pros:
- Saves time and reduces the risk of errors
- Can be integrated with your accounting software
- Provides real-time visibility into your financial data
- Can help you to identify fraudulent activity
- Cons:
- Can be more expensive than manual bank reconciliation, as it comes with bank service fees
- May not be as customizable as manual bank reconciliation
- Can be difficult to set up and maintain
FAQs
If you are new to bank reconciliation or have questions about the process, this FAQ section is a great resource. The AR experts at Chaser have answered the most frequently asked question on bank reconciliation, to give you all the information you need.
Who should prepare a bank reconciliation?
The responsibility for preparing bank reconciliations varies based on an organization's size and structure. Accountants, bookkeepers, finance professionals, and AR departments may be involved in the accounting process.
Accountants typically have the primary responsibility for internal controls, while bookkeepers may handle it in smaller organizations.
Is bank reconciliation a ledger itself?
No, bank reconciliation is not a ledger itself. It is an internal accounting records process of comparing a company's financial records with the records of its bank to ensure that the two sets of records are in agreement.
How often should you do bank reconciliation?
The frequency of bank statement balance reconciliation depends on the size and complexity of a business. Generally, it's recommended to perform bank reconciliation at least on a monthly basis, ideally more frequently, such as weekly or even daily for businesses with a high volume of transactions.
Regular reconciliation helps detect errors or discrepancies promptly, maintain accurate financial records, and ensure compliance with financial regulations.
On a bank reconciliation, what do you do with deposits in transit?
On a bank reconciliation, deposits in transit are deposits that have been recorded in the company's books but have not yet been credited to the company's bank account. To account for deposits in transit, the company should add the amount of the deposits to the bank balance shown on the bank statement. This will ensure that the company's books and the bank statement are in agreement.
What is the primary purpose of a bank reconciliation?
The primary purpose of a bank reconciliation is to ensure that a company's financial records accurately reflect the transactions that have taken place in its bank account. This process involves comparing the company's bank statement with its own records of deposits, withdrawals, and other transactions.
By identifying and correcting any discrepancies between the two sets of records, bank reconciliation helps to maintain the accuracy and integrity of a company's financial information.
What are the most common problems with bank reconciliations?
The most common problems with bank reconciliations include:
- Incorrect or missing deposits
- Uncleared checks
- Bank fees and service charges
- Errors in recording bank transactions
- Fraudulent activity in cash accounts
When to do a bank reconciliation?
Bank reconciliation should be done regularly to ensure that your financial records are accurate and up-to-date. The frequency of bank reconciliation depends on the size and complexity of your business, but it is generally recommended to do it at least monthly.
Speak to an expert
To further optimise your accounting process and, therefore, your cash flow, it’s worth leveraging accounts receivable software like that offered by Chaser. Chaser's intelligent solution integrates seamlessly with your accounting system and helps you bring revenue in faster.
Additionally, Chaser's outsourced credit control service means you can keep on top of your debtors and save valuable time and money, while improving your cash flow and customer relationships.
Contact Chaser's team to find out how Chaser can support your business bring revenue in faster.
