How to do Bank Reconciliation in 8 Easy Steps?

How to do Bank Reconciliation
How to do Bank Reconciliation


Steps and Guide for How to do Bank Reconciliation

How to do Bank Reconciliation ? – Biggest Question? although accounting software is very popular among small business owners, companies still need to regularly compare their bank statements with their personal records. This process, known as bank reconciliation, ensures that business records are correct and helps the business detect any irregularities, errors or fraudulent charges.

In this article, we will define what a bank reconciliation is, provide steps to perform it, list some common problems encountered when reconciling records, and provide an example of a bank reconciliation. How to do Bank Reconciliation?

What is Bank Reconciliation?

Bank reconciliation refers to the process of comparing a company’s books with their bank statements to ensure that all transactions are accounted for. This process is a helpful way to keep accurate records, protect against fraudulent charges, and resolve any other discrepancies or issues. Most companies do a bank reconciliation, or bank rec, at the end of each month, but the frequency depends largely on the size of the company and the number of transactions that occur. How to do Bank Reconciliation for example, some larger companies find it necessary to reconcile their records every day. How to do Bank Reconciliation

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Regardless of frequency, bank account reconciliation should be done regularly. Although some companies still keep their records manually, accounting software is available to make the process simpler and more efficient. Most of these programs integrate the company’s bank accounts and provide all data and records in one place. How to do Bank Reconciliation?

How to complete the bank reconciliation process

Here are the step by step guide to complete the bank reconciliation:

  1. Get bank records.
  2. Gather your business records.
  3. Find a place to start.
  4. Review your bank deposits and withdrawals.
  5. Check your income and expenses in the accounting.
  6. Edit bank statements.
  7. Adjust your cash balance.
  8. Compare ending balances.

1. Get bank records

You will need access to a list of your transactions to reconcile your records. You can get this information through online banking, a bank statement, or by allowing your bank to share data with your accounting software.

2. Gather your business records

You will also need access to your company’s ledger or books. Typically, this information is stored in a spreadsheet, journal, or accounting program.

3. Find a place to start – How to do Bank Reconciliation

Where you start will depend on when you last balanced your books. If you’re not sure, try to determine the last time your books matched your bank account balance and start from there.

4. Review your bank deposits and withdrawals

Make sure all your bank deposits and withdrawals are accounted for on your bank statement. If an item is missing, you will need to add it.

5. Check your income and expenses in the accounting – How to do Bank Reconciliation

Check your books against your bank statements and make sure every transaction is properly accounted for. If there is a mismatched item, find out why. Maybe the payment hasn’t gone through yet or you forgot you paid for something in cash.

6. Edit bank statements

There are times when a bank statement will not accurately reflect the company’s transactions. Common causes can be outstanding checks, bank errors, or deposits that are still in transit. Whatever the reason, make the necessary changes to your account statement.

7. Adjust your cash balance

You will also need to adjust your records to accurately reflect all of the company’s transactions. You do this by making sure all fees and deposits are posted to the company’s cash account.

8. Compare ending balances

Once you have matched the records and made the adjustments, you will need to confirm that the final balances are now the same and the reconciliation process should be complete. If they are still not the same, you will have to repeat the process to find the error.

Why Bank Reconciliation is Required

There are many benefits to performing a regular bank reconciliation. Some of these include:

  • Detection of theft and suspicious transactions
  • Ability to track bank transactions, fines and charges in company books
  • Have accurate records of the company’s receivables and payables
  • Ability to detect issues such as missed or duplicate payments

Reconciling a Bank Account Challenges

One of the main reasons for performing a bank reconciliation is to be able to detect any problems. Here are some common issues you may encounter when reconciling your bank account:

  • Checks that are returned after deposit: In some cases, the bank will refuse to deposit the check. This is usually because the check draws money from a foreign bank account. If this problem occurs, you will need to reverse the entry indicating the failed deposit by crediting the cash account, decreasing the balance, and debiting the accounts receivable account.
  • Canceled checks cleared by the bank: If a check remains uncleared by the bank for an extended period of time, you will likely cancel the check and create a refund. Occasionally, however, the payee will still try to cash the original check. If the check was declared through a bank, they should refuse to cash it. If the bank has not been notified of the voided check, you will need to credit the cash account as well as debit with an explanation of the payment.
  • Double payment: Failure to communicate with the bank about a voided check can result in a double payment. In cases where the payee cashes a voided and substitute check, you will need to ask the payee for cashing.
  • Missing and unpaid checks: There are usually several checks that have yet to be presented and/or cleared by the bank. For recent checks, continue to reconcile them as outstanding checks. For checks that have not been cashed for an extended period of time, you may need to make sure the check has been received by the payee and in some cases cancel the check and then issue a replacement.

Example of a Bank Reconciliation

The new company opened a bank account on May 2 with a deposit of $10,000. That same month, the company wrote four checks totaling $5,000 and made a $2,000 deposit at the end of the day on May 31. Therefore, as of May 31, the company’s books or cash account shows a debit balance of $7,000. However, the May 31 bank statement reflects a balance of $5,975. How to do Bank Reconciliation.

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The ledgers and bank statement show different balances and need to be reconciled. To do this, they need to compare the details of both records. Let’s say that:

  • The May 31 deposit of $2,000 has yet to be processed by the bank, so it is missing from the bank statement.
  • The bank charged a $25 service fee that is missing from the company’s books.
  • One out of four $1,000 checks written that month remains unpaid and is missing from the bank statement.

In order to reconcile, they will need to fill in the missing transactions so that both balances match. For this they will:

  • Reduce the cash account balance by $25 to reflect the bank service charge, so the new balance will be $6,975.
  • Increase the bank statement balance by $2,000 to reflect the deposit and decrease it by $1,000 to account for the bounced check. The adjusted bank statement balance is now $6,975.

The company’s bank statement and books now have a balance of $6,975, so the bank statement is reconciled. How to do Bank Reconciliation

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