1 Finding the perfect match isn’t always easy, especially when it comes to business transactions! Let’s say you check your records at the end of a certain period, and while calculating your total figures and cross-checking them with your bank statement, something doesn’t add up. There’s a mismatch between your cash balance and your bank statement. While this is common, you have to identify these differences and reconcile them to ensure your transactions match.
A bank reconciliation is when you compare your cash inflow and outflow (your cash balance in your ledger) with your bank records for a certain period, and make adjustments to match them. The discrepancies between the two could be due to many reasons, including errors you’ve made while entering an amount, duplicate entries, a payment that’s yet to clear, or even bank interests and fees. When you check these and reconcile them, you can verify your transactions for that period and ensure that your records are accurate, with everything accounted for.
Through bank reconciliation, you can spot errors and resolve discrepancies. This includes spotting funds or deposits you may have missed, tracking interests and fees from the bank, identifying duplicate or fraudulent payments, and finally checking if you have accurate records of your AR (accounts receivable) and AP (accounts payable) while confirming receipts. Knowing how to do bank reconciliation effectively will ultimately ensure that you have the right amount of money to go forward with.
If bank reconciliation seems daunting or confusing, this guide can help you perform bank reconciliation smoothly.
How to perform a bank reconciliation: A step-by-step guide
Before you start reconciling, get your records ready and look for the last time that the balance in your ledger was the same as your bank statement. Begin your reconciliation process from there, and factor in deposits and withdrawals you may have missed before. Check if anything from the previous period was carried forward, and make sure you recorded all your transactions through the end of your bank statement. Of course, ensure you’re matching records for the same period for that particular account.
Step 1: Make adjustments to your bank statements
Check your ledger and see if you’ve recorded something that hasn’t hit the bank yet. Based on this, make adjustments to your bank statement for that account. Here are some instances where you’d have to make changes to your bank statements:
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Add deposits in transit: Amounts that you’ve received and recorded, but haven’t been recorded by the bank yet.
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Deduct outstanding checks: These are checks you may have recorded and sent, but the payee may not have collected it, and so it wouldn’t have cleared from your bank.
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Adjust any bank errors: Any mistakes made by the bank while creating the bank statement.
Your bank statement may have a higher balance than your ledger because of checks and other payments that haven’t hit the bank yet. To tackle this and find outstanding checks, print out a check register for the month so you can compare it with the list of checks that have been cleared, along with other payments. Checks you’ve issued but aren’t cleared should be adjusted in your bank statement. Outstanding checks from previous months should be accounted for until they are cleared, or you could choose to cancel the check and issue another one.
Step 2: Make adjustments to your ledger
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Check your receipts
Go through your bank statement to see if you’ve missed anything; factor in payments you may have received but failed to record in your ledger. This could happen because you weren’t notified of a payment, and your bank statement will reveal this. Make sure each deposit (whether it’s from a sale, interest, or refund) is recorded separately, even if they were all made on the same day, and enter anything you may have missed.
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Check your payments
The bank may have charged you for something that isn’t recorded in your ledger. Go through the bank withdrawals recorded in your books, including bank fees, as this is something not many consider. Your account may have been overdrawn and charged overdraft fees, or service charges. Look out for payments you may have recorded by accident, payments made via cash, or payments made from another account. These payments would, therefore, be missing from your bank statement for that particular account. Keep track of these and deduct them from your ledger, so each entry matches a withdrawal in your bank statement.
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Make the final adjustments
Add interests or any deposits you’ve received, adjust your calculation, typing, or omission errors, and deduct NSF (non-sufficient funds) checks (those that were not honored by your bank because you didn’t have enough funds). Account for un-presented and un-credited checks as well, by adding and subtracting them respectively.
Step 3: Make a comparison of the two or review it again
Once you’re done making these adjustments, calculate the revised balance and the amount in your books; the bank statement should be the same. In case they still don’t match, repeat the process. If there’s an undocumented reconciling item, check if the difference pops up from a different period. If it’s only a small difference, adjust it and record the difference in your books. When they do match, prepare journal entries to account for the balance. Note that outstanding checks don’t have to be recorded in your ledger because they’re already there.
Reconciling your accounts can seem like a long process, but it’ll be super simple if you do it frequently and stay updated on your transactions. It’s always best to reconcile your accounts daily or weekly (the more transactions you deal with, the more often you should do a bank reconciliation). This will help you avoid unnecessary hassles and resolve issues, as you’ll have a clearer memory of the transactions you’ve made.
Follow the process we’ve laid down step-by step, and soon you’ll be prepped for bank reconciliations! With accounting software like Zoho Books, doing a bank reconciliation is even easier with quick and direct access to your bank statement and records, along with an easy reviewing and matching process.
Your guide is very helpful and important to me. Thanks.