Accounting

8 Simple Steps for an Effective Bank Reconciliation

Bank reconciliation is rarely something most small business owners and entrepreneurs want to do. It is, however, essential to keeping the financial aspects of a business running smoothly. Bank reconciliation is the process of reconciling your bookkeeping records with your bank statement. It includes all expenditures and deposits during a specific time period.

The following is a guide for keeping the process easy and simple. This will make bank reconciliation as effective as possible.

1. Document and Save Everything

First, you’ll want to save and organize all the records and documents. This means making a plan to keep all documents in a safe place when they come in. You’ll have quick and easy access to your items.

The items you’ll want to save include receipts for travel expenses, general expenditures and check stubs. There are several specific items needed that you’ll want to have ready before you begin a bank reconciliation. These include the following:

The Ledger or Journal – This is where you should record all your business transactions. You may also be using a general journal or a ledger as a double-entry system for bookkeeping.

Company Checkbook – You’ll also need the actual checkbook and stubs that you’ve been using. Keeping accurate records will make it easier to go over the checkbook each time you complete a bank reconciliation. Business owners often get busy and forget to document and save everything in an organized manner. It’s important to go over all your own records before beginning a bank reconciliation.

Invoices and Receipts – The next step is to gather and organize all invoices, receipts and deposit statements. You may not need these items while comparing the ledger to the bank statement if you are recording everything correctly. But you’ll want to gather them and have the items ready if you need to evaluate any discrepancies. Try to organize them according to the dates.

Bank Statement – Make sure you have the most recent bank statement available before you start. Whether you receive the statement by snail mail or email, this is the only item you should need from your bank. It’s a good idea, however, to have the previous month’s statement as well before you start.

2. Complete the Reconciliation in Sections

The process is much easier and less confusing if it’s done in increments. There are several ways to split the different parts of a bank statement into sections. You’ll be able to easily check and analyze your records. The following are a few suggestions for breaking down a bank reconciliation into separate sections.

Account for Checks on the Statement – Match all the checks that are showing up on the bank statement against your checkbook. Do the same with your ledger or journal. Make sure to clearly mark or check each of these items off when they match. This section should be one of the easiest to reconcile. This will likely include the bulk of your bank statement.

Outstanding Amounts and Checks – The next step is to record all the checks that you have already recorded in the company account, but have not yet cleared by the bank. There will likely be several checks that fall into this category and need to be carefully taken into account. Add this amount to the ending balance.

Unrecorded Deposits – You’ll need to include in the bank statement deposits that you’ve recently made. These are also called deposits in transit. Business Plan Hut states that if your business would make a deposit on the last day of the month this particular deposit probably wouldn’t show up until next month’s statement. You’ll want to add and clearly mark all of these types of deposits to the ledger.

Previous Reconciliation – You will want to have the previous reconciliation. Keep both statements together while you’re working. There may be several items such as checks that didn’t appear on the last statement that will show up on the newer one. Make sure all outstanding deposits and withdrawals went through. You’ll want to make sure they are showing up correctly on the current statement.

Make sure to check off all sections and specific items that match as you go through each section. You are now finished completing the reconciliation in sections. It’s time to go back and review the discrepancies.

3. Review Discrepancies

Once you’ve gone through each section of the statement, any discrepancies should now stand out. The next step will be to carefully review each one. When reviewing discrepancies, it’s important to watch out for basic mistakes. You will be able to easily and quickly correct many of these.

It’s easy to make errors that involve periods and commas. For example, instead of entering 47.20 you may have entered 472.00.

Simple errors that include writing digits in the wrong order can cause discrepancies.

Sometimes it’s easy to make an entry twice or forget to put it in at all. It’s important to write all entries accurately and clearly.

There may be an error if what you recorded as a cash purchase or deposit in the ledger was actually written as a check.

Sometimes the bank will make an error. If this is the case, you’ll need to contact your bank regarding these discrepancies.

Most of the discrepancies you’ll find will involve basic human error. This is why you should conduct a bank reconciliation slowly and carefully. After you’ve found any discrepancies you’ll need to document why they occurred. You can do this on your software or on your manual document, such as an Excel sheet. You may want to write the reasons on the bank statement as well. Your have documented your discrepancies. You will also have the reasons they occurred.

Chron states that math errors, outstanding checks and electronic fees, are the most common reasons for discrepancies. Sometimes, however, the reason is fraud. This may occur because someone inside the business has recorded putting money in the bank but not actually deposited it. There could also be external sources of fraud as well. Completing bank reconciliations in a timely manner will allow you to uncover cases of fraud or theft as quickly as possible.

It’s important to note that if you’re using accounting software, a reconciliation discrepancy report will be generated. This will enable you to clearly and efficiently clean up any errors. Once you’ve checked and recorded the reasons for basic errors that often occur, there are still a few other items you may have forgotten to include.

4. Make Sure to Include the Till

Including what’s currently in any cash register will be necessary when reconciling all the finances in your company. According to the balance, mishandling the cash drawer is one of the most common ways you are likely to lose or have unaccounted money when running a business. This can also cause problems when it’s time for a bank reconciliation.

To reduce confusion during a reconciliation there are several steps you can take. For starters, you should obviously count and record cash on a daily basis. It may also be necessary to pull a current sales report throughout the day if your business is making a lot of transactions with cash. This will also keep your cash system running smoothly.

You may want to implement a triple reconciliation process during reconciliation. You can use a book balance, an accounting balance and the actual cash in the drawer. This will reduce the chance of making any mistakes.

5. Include Fees and Interest

Service fees and interest are items that are easy to forget but can cause major problems if left out during a reconciliation. Bank statements should list how much interest your business has earned each month. You may also see returned check fees and overdrafts on the statement as well. The bank may also add a service charge for operating the account. You’ll need to add this amount each time you complete a bank reconciliation.

Again, it’s good to go over things in sections. Deduct any service fees first and then add interest. You won’t be able to add or deduct these items until you receive the bank statement since things like interest will change from month to month. Even fees may change depending on your level of activity. How many checks you process each particular month will be one of several factor that may affect the charges for fees.

6. Voided Transactions

Sage City explains how voided transactions can affect the books during a bank reconciliation. For example, if you post a check on January 20th this means the check is in the bank reconciliation and the company ledger for January. If you void the check in February it still remains in the ledger for January. This is true even after it is no longer counted in the bank reconciliation for January.

You should use the same date to void the check that was on the check. It’s important to note that if you’re using an automated system, the process for voiding a check won’t be exactly the same for different types of software. If the history is not saved in certain types of software voided transactions may be completely deleted. If you’re using a software program, you should keep some type of history or record so you can store voided transactions. This is for security and auditing purposes. Do the same if you’re completing bank reconciliation manually.

You will now compare the company’s ledger with the bank statements. If there are still errors you’ll need to go through the previous steps to find where the discrepancies have occurred. Once the bank statement and the company ledger are equal you have finished the reconciliation.

7. Reconcile More Frequently

Bank reconciliation will be less painful if you do it more frequently. Most people will try to balance their checkbook on a regular basis. You should also conduct a bank reconciliation for your business in regular intervals. Score recommends conducting your reconciliation process once a month. Even if you keep meticulous books, it’s necessary to complete the reconciliation process on a monthly basis.

Doing reconciliation every month will help ensure all funds are being deposited and withdrawn in an accurate manner. It will also help you detect any type of fraud that may be occurring. Jumping into a bank reconciliation can seem overwhelming. This is especially true if you’ve never done one before. Bank reconciliation can be easy if you follow these steps.

8. Consider Automation

Some people still complete their bank reconciliation manually. If you’re operating a small business that doesn’t have a large amount of transactions this may work effectively for your company. Your business may be expanding rapidly. You may also see a large amount of discrepancies or are struggling to complete bank reconciliation on a regular basis. To make the process easier, you’ll want to consider using some type of accounting software.

Automating the process will almost certainly make it easier and more efficient to complete. There are several types of software that can provide financial assistance. Lots of software will include bank reconciliation. A professional accounting service can help you out. They can decipher all the products available to find the best fit for your specific business.

Your business will likely benefit from professional financial assistance. This is true whether you use software or complete bank reconciliation manually. Founder’s CPA can provide a variety of financial services. These include payroll, taxes and even outsourced CFO services. They have the expertise to help you select, set up and understand the best accounting software for your business. Contact Founder’s CPA for a free consultation or fill out the form below.

Curt Mastio