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:
Gather Documents: Collect the company's bank statement and internal cash account records for the same period.
Compare Ending Balances: Note the ending balance on the bank statement and the company's ledger.
Identify Outstanding Items: List transactions that appear in the company records but not yet on the bank statement (outstanding checks, deposits in transit).
Identify Bank-Side Items: Note transactions on the bank statement not yet recorded in the company books (bank fees, interest, electronic payments).
Record Adjustments: Update the company's books to account for items identified in step 4.
Reconcile Balances: Adjust the bank balance by outstanding items to confirm it matches the adjusted book balance.
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:
Outstanding checks:
Check #1089: $1,200
Check #1092: $850
Total outstanding checks: $2,050
Deposits in transit:
April 30 deposit: $950
Total deposits in transit: $950
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:
Regular Frequency: Reconcile accounts at least monthly, if not more frequently
Segregation of Duties: Have different employees handle banking and reconciliation
Timely Adjustments: Record identified adjustments immediately
Documentation: Maintain detailed reconciliation reports with explanations
Review Process: Implement management review of completed reconciliations
Standardized Procedures: Establish consistent reconciliation protocols
Aging Analysis: Monitor and investigate long-outstanding reconciling items