Bank Reconciliation

Bank Reconciliation is the process of comparing a company's internal financial records with the records provided by its bank to ensure both sets of records are in agreement. This systematic comparison identifies and explains any discrepancies between the two records.

How Bank Reconciliation Works

The Bank Reconciliation process typically follows these steps:

  1. Gather Documents: Collect the company's bank statement and internal cash account records for the same period.

  2. Compare Ending Balances: Note the ending balance on the bank statement and the company's ledger.

  3. Identify Outstanding Items: List transactions that appear in the company records but not yet on the bank statement (outstanding checks, deposits in transit).

  4. Identify Bank-Side Items: Note transactions on the bank statement not yet recorded in the company books (bank fees, interest, electronic payments).

  5. Record Adjustments: Update the company's books to account for items identified in step 4.

  6. Reconcile Balances: Adjust the bank balance by outstanding items to confirm it matches the adjusted book balance.

  7. Document Results: Prepare a reconciliation statement showing the process and explanations.

Example of Bank Reconciliation in Action

Let's consider a practical example:

Reconciliation for Business Account #12345 - April 2025

Starting figures:

  • Bank statement ending balance: $12,500

  • Company ledger cash balance: $13,875

Reconciling items:

  1. Outstanding checks:

    • Check #1089: $1,200

    • Check #1092: $850

    • Total outstanding checks: $2,050

  2. Deposits in transit:

    • April 30 deposit: $950

    • Total deposits in transit: $950

  3. Bank-side items:

    • Monthly service fee: $25

    • Interest earned: $10

    • NSF check returned: $250

    • Total bank-side adjustments: $265 (net expense)

Reconciliation calculation:

  • Bank statement balance: $12,500

  • Add: Deposits in transit: +$950

  • Less: Outstanding checks: -$2,050

  • Adjusted bank balance: $11,400

  • Company ledger balance: $13,875

  • Less: Service fee: -$25

  • Add: Interest earned: +$10

  • Less: NSF check: -$250

  • Adjusted book balance: $11,400

The reconciled balances now match at $11,400, confirming the accounts are in agreement once all items are properly accounted for.

Types of Reconciling Items

Common reconciling items in bank reconciliations include:

  • Outstanding Checks: Checks issued but not yet presented to the bank

  • Deposits in Transit: Deposits made but not yet processed by the bank

  • Bank Service Charges: Fees charged by the bank not yet recorded in company books

  • Interest Income: Interest earned on bank balances not yet recorded

  • NSF (Non-Sufficient Funds) Checks: Customer checks that bounced but were initially recorded as deposits

  • Automatic Payments/Deposits: Electronic transactions initiated by third parties

  • Bank Errors: Mistakes made by the bank in processing transactions

  • Accounting Errors: Mistakes in the company's internal records

Benefits of Regular Bank Reconciliation

Regular bank reconciliation offers numerous advantages:

  • Error Detection: Identifies and corrects mistakes in either set of records

  • Fraud Prevention: Helps detect unauthorized transactions and potential fraud

  • Accurate Financial Reporting: Ensures cash balances reported are accurate

  • Cash Flow Management: Provides clear visibility into available funds

  • Financial Control: Establishes an important internal control mechanism

  • Audit Compliance: Facilitates smoother external audits with documented reconciliations

  • Timely Problem Resolution: Allows quick addressing of discrepancies and banking issues

Automation in Bank Reconciliation

Modern accounting systems have transformed bank reconciliation:

  • Bank Feeds: Direct connections to bank accounts for automatic transaction imports

  • Matching Algorithms: Automated matching of bank and book transactions

  • Exception Handling: Streamlined processes for managing unmatched items

  • Digital Documentation: Electronic storage of reconciliation reports and supporting documents

  • Continuous Reconciliation: Shifting from periodic to ongoing reconciliation processes

Specialized accounting software like Timber includes bank reconciliation modules that can reduce the time required for this process by 80-90% compared to manual methods.

Best Practices for Bank Reconciliation

For effective bank reconciliation, follow these guidelines:

  1. Regular Frequency: Reconcile accounts at least monthly, if not more frequently

  2. Segregation of Duties: Have different employees handle banking and reconciliation

  3. Timely Adjustments: Record identified adjustments immediately

  4. Documentation: Maintain detailed reconciliation reports with explanations

  5. Review Process: Implement management review of completed reconciliations

  6. Standardized Procedures: Establish consistent reconciliation protocols

  7. Aging Analysis: Monitor and investigate long-outstanding reconciling items