How to Prepare a Bank Reconciliation

Performing a bank reconciliation can be daunting for any business owner or employee who is tasked with the job for the first time. Matching the inflows and outflows of cash from the business ledger to the beginning and ending bank balances can get complicated, especially for high-volume accounts. 

Tack on common problems that can arise, and it can quickly become a time-consuming endeavor. However, in spite of the time commitment needed to perform them, bank reconciliations are one of the most important regular financial functions that a business can undertake.

Whether you are new to preparing a bank reconciliation or just need some guidance on how to oversee the process internally, this step-by-step guide will ensure an accurate outcome:

1. Obtain Bank’s Ending Cash Balance
   
   Your bank statement should contain all pertinent information on beginning and ending cash balances to use for your reconciliation in conjunction with your ledger. When performing monthly reconciliations, this statement is typically sent to you automatically. However, if you are preparing reconciliations more frequently, like daily, you will need to log into your bank accounts online to obtain this information.
   
   
2. Match Checks and Deposits that Have Cleared 
   
   All cash that moved into or out of your bank account should have a corresponding record in your ledger. This is the easy part of a bank reconciliation because it simply involves crossing off any cash inflows and outflows after verifying that the amounts match. In this step you are primarily looking for any bank errors or internal mistakes that would cause the values of an individual check or deposit to differ. For anyone who has ever balanced a checkbook, this process will feel very familiar.
   
   In an ideal situation, the bank reconciliation will be complete at this point. However, that is rarely the case due to money in-transit, unaccounted for fees, and other problem scenarios.
   
   
3. Verify Items In-Transit 
   
   Identify any items that have not cleared, including deposits in-transit from the company to the bank and any checks in-transit from the bank to the business. Because this cash is still in route to its destination, it poses a challenge for a reconciliation because it causes a balance mismatch. To resolve this, accompanying journal entries must be booked to account for the movement of cash that is in-transit.
   
   Always put cash where it will end up ultimately. Deduct outstanding checks and add back any deposits in-transit. If these adjustments result in identical bank statement and ledger balances, the reconciliation is finished. Again, however, additional factors can complicate matters, requiring further steps.
   
   
4. Account for Fees and Interest
   
   Deduct bank service fees and penalties such as overdrafts, NSF (non-sufficient funds) checks, and check printing fees to match bank statement records with the ledger. Similarly, interest earned on the account balance should be added bank in to reflect accurate balance totals.
   
   Adhering to a strict bank reconciliation schedule (daily or monthly) will protect cash flows to minimize unnecessary bank fees. Penalties resulting from low or negative balance situations should be eliminated with proper reconciliation measures in place.
   
   At this juncture, the bank reconciliation should be finished. If, however, the balances still do not match, some investigative work is needed.
   
   
5. Look for Undocumented Withdrawals
   
   While it is possible for undocumented deposits to occur, those are far rarer than undocumented withdrawals. Cash removed from the business account without a valid, accompanying record in the ledger can point to careless cash management or fraud.
   
   During a bank reconciliation, if cash is unaccounted for and a root cause cannot be determined, it is prudent to bring in an experienced third-party finance professional like an auditor or forensic accountant. An impartial individual like this can determine if internal or external fraud is occurring to help stop the unauthorized outflow of money.
   
   Once the reconciliation is complete, keep a record of it in case it is needed during an audit. While the IRS will not examine bank reconciliation records, companies that require audited financials as a part of an operational agreement may need them. Furthermore, it is a good idea to hold onto these to help identify payment trends or serve as support when payment problems are identified.
   
   

Get a Bank Reconciliation Done Today

With all the steps required to reconcile bank statements properly, many businesses choose to hire a finance professional to handle their bookkeeping and accounting needs. Outsourcing this function provides more accurate financial reporting and minimizes fraud risk. Additionally, it frees up in-house staff to spend more time on their primary focus areas.

Find out how Accounting Solutions Partners can fulfill your company’s accounting needs. Our team will partner with your business onsite or in the cloud to provide top-tier financial support. Contact us here for more information.

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Thank you for following our bank reconciliation series for business owners. If you missed any of our previous articles, you can find additional resources here:

>  What is a Bank Reconciliation and Why is it Important?
>  How Often Should You Do a Bank Reconciliation?
>  What Do You Need to Reconcile a Bank Statement?
>  Typical Bank Reconciliation Problems for Small Business