Bank Reconciliation
One of the most common (and most commonly done incorrectly or incompletely) business practices. Reconciling your bank statements monthly is critical to ensuring that you don’t have some sort of fraud, and to ensure that you have a firm understanding of costs and transactions.
This procedure compares the account balance, as reported by the bank, against the account register in the company’s general ledger. This process ensures all cash items clear the company’s bank account in a timely manner. It also prevents the company’s general ledger from becoming clogged with inaccurate or irrelevant information.
Bank reconciliation steps
The reconciliation is comparing your record of sales and expenses against the record your bank has. The process of a bank reconciliation involves making adjustments to the balances in both the bank statement and the company’s records to confirm that the ending balances match and that every item is properly accounted for. It is important to prepare bank reconciliations in a timely and regular basis (monthly), so if questions regarding bank fees or errors arise both the company and the bank can be made aware as soon as possible.
Because of the lag time between deposits made and checks written, and their actual posting to your account, it is rare for the ending balances to match without adjustment. Reconciliation ensures all transactions are accounted for, and provides a true cash balance.
1) Get bank records & G/L records
You need a list of transactions from the bank – typically from a bank statement, or downloaded. This includes any credit cards as well to ensure full reconcillation. Utilize your ledger (Netsuite, Quick books, etc)
2) Find your starting point
Find the last time the balance on your business books was the same as the balance in your bank account. Start the reconciliation from there.
3) Compare the bank statements to the G/L
Start the bank reconciliation process with a comparison of the company’s bank statement and general ledger cash account. Check off all items that match. This part of the reconciliation ensures all items recorded in the general ledger have cleared the company’s bank account. Once an item clears the bank account, it usually represents the finality of that particular business transaction. Make sure each deposit appears as income in your accounts. If something is missing, enter it. You’ll need to figure out if it was a sale, interest, a refund, or something else.
At times there will be a deposit that encompasses multiple transactions, for instance a customer may cut 1 check that covers 3 separate invoices. It is critical that in the G/L the transaction is recorded in a manner that lets you directly tie out the cash receipt (on the bank statement) to the ledger. Adjust your journal entry practices if necessary to get this right.
4) Add Deposits
Once the comparison process is complete, note all items that remain on the company’s general ledger. Add any deposits in transit to the ending balance. Deposits in transit are deposits that you have recorded in your register but have not appeared on the bank statement.
5) Deduct Outstanding Checks & Withdrawals
Deduct outstanding checks from the ending balance. These checks have been deducted from your check register, but have not yet cleared through the bank.
All bank withdrawals should be recorded in your books. This includes things like bank fees. Each entry should match a withdrawal on your bank statement. If not, find out why. One of your payments may not have cleared yet, or maybe you paid using cash or a different account.
6) Deduct Bank Service Charges and add interest
Deduct bank service charges. Service charges could be account maintenance fees, check overage fees if you wrote more checks than you are allotted for the month, wire transfer charges, returned check fees, etc. This often requires journal entries to ensure the ledger ties out to the statement.
Add interest earned if you have an interest bearing account.
7) End balance and Error Check
Add or deduct any bank errors to the ending balance. Examples would be incorrect deposit amounts and incorrect debits.
Add or deduct errors in the check register. These errors could include posting a payment that was not actually a cash transaction, or omitting a payment.
You may need to prepare journal entries as part of this reconciliation process. These journal entries will correct any errors found during the bank statement and general ledger comparison. Once all journal entries are posted, you may re-run the general ledger cash account to update the ending balance for all new posted items.
Compare the adjusted bank statement balance per your reconciliation to the adjusted cash balance per the general ledger. The balances should be equal. If the two balances do not match review the steps; verify that the bank balance has been adjusted for all deposits in transit and outstanding checks, and that all activity has been properly posted in the company’s general ledger. After you’ve checked all the deposits and withdrawals, your business bank balance should match the totals in your business accounts. This will be the starting point for your next reconciliation.
No matter how you do bank reconciliation, you’ll come across issues from time to time. There will be amounts that appear in one set of records but not the other. Finding and correcting these exceptions is the main goal of the exercise.