How to Do a Bank Reconciliation

What is a Bank Reconciliation?

A bank reconciliation is an exercise in which the entries that appear on the account statement received from the bank are compared with the entries recorded in the bank account on the general ledger. By doing a bank reconciliation you ensure that all banking transactions are correctly accounted for and reflected on the books, and therefore in your financial statements. It also allows you to determine that the balance in your account according to the bank is correct, detecting any error in a timely manner in order to have it corrected.

Why Is It Important to Do a Bank Reconciliation?

The bank reconciliation is basically a tool used to ensure that both the bank balance per the general ledger and the balance per the bank are correct. The reconciliation therefore forms a fundamental part of the administrative internal control system.

With the bank reconciliation you can ensure that all deposits are correctly reflected in the balance in your account per the bank and have not been credited to another account, detect any deposit booked that has not reached the bank for some reason, identify deposits to your account that have not been booked, identify outstanding checks, detect any check issued and cleared but not booked, record all the bank charges, and detect errors in the amounts of individual transactions, on your own accounting books or in the bank account statement.

When Should the Bank Reconciliation Be Done?

When you receive your bank statement online and keep your accounting records up-to-date in real time, you can do a bank reconciliation at any time. But in any case, the reconciliation should be done on a regular basis, at least monthly.

It is important to have a bank reconciliation that corresponds to the date you close your accounting books, for example at the end of each accounting period, which could be monthly, quarterly, semi-annually, or annually. This serves as back-up for the accounting balances that are used as the basis for generating financial statements. The cut-off date per the bank should coincide with the closing date for your accounting periods.

How is the Bank Reconciliation Done?

Differences between the balance in your account per the bank and the balance in the bank account on the books can be due to timing differences, charges or credits posted on your bank statement of which you were not aware and therefore did not book, and errors, which could be on the bank statement or in the bank account on your books.

A general format for a bank reconciliation starts with the balance per the bank statement. To that balance, you add deposits in transit (deposits booked but not yet credited on the bank statement). You would also add back the bank charges per the bank statement that you have not yet booked. You would then subtract deposits that appear on the bank statement that you have not yet booked, outstanding checks, and other credits that appear on the bank statement that you have not yet booked. You would also add or subtract any differences in amounts for items that appear on the bank statement and on your books. The result should be the balance you have in your bank account on the general ledger.

What Should You Do with the Bank Reconciliation?

Since the bank reconciliation itself is part of the administrative internal control system, you should document and keep a copy of the reconciliation. And, the bank reconciliation serves as the basis for making the necessary corrections, so that both the accounting books and the bank reflect the correct balance in the account.

Outstanding Checks

You should follow up on checks that have been issued but have not cleared the bank. When a check remains outstanding for too long, it could be necessary to find out why the check has not cleared. It could be that the check was lost, that it was never actually sent, or that the payee has not realized that the check has not been deposited or cashed. It could also be that the payee is holding the check, pending the resolution of some discrepancy.

When a check is held and not sent to the payee, it needs to be determined whether this was due simply to an error, or if the check is being held for some reason. It could be that the check is being held pending completion of some action on the part of the payee, such as the delivery of a purchase order or the completion of a contracted service. In this case it is necessary to see what action is required to bring the matter to a conclusion, in order to deliver the check, void the check and issue a new check for a different amount, or to resolve that payment should not be made and the check should be voided.

In the case of a lost check, a stop payment order should be made with the bank and the check should be re-issued.

In other cases, when the payment is correct and the payee has received the check but has not cashed or deposited it, it may be necessary to remind the payee to cash or deposit the check, and thereby fulfill the obligation your company has with that person or company.

Deposits or Credits per the Bank that are Not Booked

When there appear on the bank statement deposits or credits that are not recorded on the books, it is first necessary to investigate them to determine their nature. They could be deposits or credits of which your company is aware but has not yet booked; deposits or credits of which you are not aware, but to which you are entitled; or deposits or credits that do not belong to your company.

Once you have determined the nature of the deposit or credit, you can then take the necessary action. You can book the deposit or credit when you are aware of what it is for; you can obtain the information and applicable documentation to record a deposit or credit of which you were not previously aware; or you can advise the bank in the case of a deposit or credit that does not correspond to your account.

Bank Charges

The bank charges that appear on your statement may be maintenance charges, charges for checks drawn, commissions, interest on overdrafts, or others. You should review the charges to determine whether they are correct according to the conditions of your account and the agreement your company has with the bank.

Many times, routine bank charges are booked directly from the bank statement, and the statement itself serves as back-up for the accounting entry. In other cases it may be necessary to consult the bank to determine the reason for the charges and whether they should actually be charged. If not, you should not book them and should carry out the necessary actions with the bank to get these charges reversed.

Example

ABC Company has the following activity in the bank account on its books for the month: opening balance on 04/01/07 of $1,000; deposit dated 04/05/07 for cash sales of $300; check No. 102 dated 04/10/07 for $150; check No. 103 dated 04/20/07 for $300; deposit of $200 for a collection from a customer, sent to the bank on 04/29/07; and check No. 104 dated 04/30/07 for $350, resulting in an ending balance at 04/30/07 of $700.

The bank statement for this account shows the following activity for the same month: opening balance on 04/01/07 of $1,250; minus check No. 101 for $250 cleared on 04/02/07; plus deposit of $300 credited on 04/05/07; minus check No. 102 for $150 cleared on 04/12/07; plus deposit of $50 credited on 04/14/07; minus check No. 103 for $300 cleared on 04/25/07; minus account maintenance fee of $10 charged on 04/30/07; minus fee of $15 for checks charged on 04/30/07; plus credit of $5 on 04/30/07 for accrued interest on the account, resulting in an ending balance at 04/30/07 of $880.

The bank reconciliation for the account would be as follows: opening balance of $880 per the bank statement on 04/30/07; plus deposit of $200 booked on 04/29/07 but not yet credited by the bank; plus bank charges of $25 ($10 + $15) on 04/30/07 not yet booked; minus deposit of $50 credited by the bank on 04/14/07 but not booked; minus outstanding check No. 104 for $350 dated 04/30/07; minus credit of $5 on 04/30/07 per bank statement for accrued interest not yet booked, resulting in the balance of $700 per the books on 04/30/07.

It should be noted that the difference of $250 between the opening balance per the bank statement ($1,250) and the opening balance per the books ($1,000) on 04/01/07 corresponds to check No. 101 that was issued in the previous month and cleared the bank on 04/02/07. This amount would appear in the bank reconciliation as of 03/31/07.

Actions to be Taken

You need to verify that the deposit of $200 booked on 04/29/07 appears in the bank statement next month. In investigating the deposit of $50 on 04/14/07 you determine that it was a return of an excess payment made to a vendor. You need to book the deposit, with a debit to the bank account and a credit against the account originally charged when you booked the payment to the vendor.

You need to book the credit for interest of $5 accrued on your bank account, with a debit to the bank account and a credit to interest income. You should verify that check No. 104 for $350 clears the bank next month. And you need to book the bank charges of $10 and $15 dated 04/30/07, with a debit to bank charges expense and a credit to the bank account.