How to do an accurate bank reconciliation in 6 simple steps

As a business owner, you know the importance of keeping accurate records. You’ll also know that this isn’t always an easy task – in the daily hustle and bustle, it’s easy for transactions to get lost and numbers to get entered incorrectly.

That’s where bank reconciliation comes in.

An important process that helps ensure accurate records and keeps your accounts up to date, performing bank reconciliations will also give you a chance to monitor your accounts for fraud and other irregularities.

In this article, we’ll explore the bank reconciliation process in detail and help you get started today.

What is bank reconciliation?

Bank reconciliation or, more accurately, bank statement reconciliations, in accounting is the process of ensuring that your accounting software and bank account match. Your accounts are considered reconciled if they provide the same balance on any given date.

Reconciliation in banking used to be a tedious and time-consuming manual task. Modern accounting software has largely made these difficulties a thing of the past, as many of the steps are now automated.

Bank reconciliation is the most common type of reconciliation performed by most businesses. Other forms of reconciliation that you might be familiar with include vendor reconciliation and customer reconciliation.

What’s the purpose of bank account reconciliation?

Bank account reconciliation is important for a variety of reasons. It enables you to:

• maintain an accurate measure of how much money your business has on hand at any given time

• detect errors, including double payments, data entry mistakes, and incorrect math. These issues can crop up in even the most thorough businesses

• keep an eye out for theft or fraud

• develop accurate reporting for tax purposes

• avoid bank fees incurred as a result of overdrafts and insufficient funds.

Many business owners simply assume the numbers from their bank and accounting software are correct. While it’s highly likely that they are, issues do occur, and it never hurts to double check.

How often should you reconcile bank accounts?

Generally, you want to reconcile your bank accounts every time you receive a statement from your bank – typically, that’s monthly.

Depending on the volume of transactions your business processes, you may also want to perform a reconciliation of your bank accounts on a weekly or daily basis.

This can help reduce the volume of transactions you need to comb through each month and ensures you stay ahead of any potential issues.

How to do a bank reconciliation (step by step)

The bank reconciliation process is pretty straightforward. You’ll need to obtain the proper documents, compare your balances and transactions, and correct any errors.

Let’s walk through each step one by one.

1. Obtain your bank and business records

Step 1 of your bank reconciliation is to gather your records. You’ll need a bank statement for the period you want to reconcile, as well as your business’s accounting records for that period. For a proper reconciliation, these should contain all transactions – both incoming and outgoing.

2. Check your opening balance

Verify that the starting balance on your bank statement matches the starting balance on your own accounting records. If you’re doing regular reconciliation, you might think you can skip this step, but we’d recommend against it. This is your foundation, and it’s important to make sure it’s accurate.

3. Review your transactions

With your opening balance verified, it’s time to start reviewing your transactions. Go through each line one by one, comparing your business’s account to the bank statement.

Some bank reconciliation examples might include sales, refunds, deposits, purchased supplies, payroll expenses, interest charges, and bank fees. Take your time here and compare each line to ensure accuracy. A thorough review at this stage can save a lot of time down the road by catching errors early.

If you find that there are errors in some of the numbers, or entries are missing from either your account or the bank statement, you’ll need to determine the cause and make adjustments so that the two match.

4. Adjust the bank statement

If you find that there are items on your business’s account that are not reflected on the bank statement, you’ll want to add them. These items might include cash-in-transit, pending deposits, outstanding cheques, and bank errors.

Pending cash deposits will need to be added to the bank balance. Outstanding cheques should be deducted from the balance to match your own records. Errors may require addition or deduction — make sure you take the time to investigate them before making any changes.

5. Adjust the cash account

Similarly, your business’s cash account will likely need some adjustments. Bank fees and other charges, accrued interest, not sufficient funds (NSF) cheques and errors are some of the items you might need to adjust.

As with the bank statement, make sure you investigate any suspected errors to determine the cause and ensure you’re adjusting the right account. For example, you may find a mismatch on a large sale. This could be an incorrectly entered item on your ledger, but it may also reflect an error on the bank’s part. These two causes have very different outcomes, as one results in your business effectively losing money you thought was there.

6. Check your closing balance

Once you’ve gone through and matched each transaction, compare the final closing balance on the bank statement to your account. The two should match. This number then becomes the starting balance for your next reconciliation.

Bank reconciliation challenges

The bank reconciliation process might seem simple on the surface — and it often is. But there are some challenges you may face that can complicate things.

Let’s look at some examples of these hurdles.

Cash-in-transit

Cash deposits that are still in transit can cause discrepancies on your bank reconciliation because they show on your ledger, but not on your bank statement.

High-volume accounts might have a large number of transactions constantly in transit, so care will have to be taken to ensure the transactions are tracked accurately in your system.

Outstanding cheques

Similarly, it’s not uncommon to have cheques that either haven’t been deposited yet or haven’t cleared the bank.

The best way to deal with these is simply to ensure that your own books are accurate. If there is a large volume of cheques outstanding, you may need to reconcile more often to ensure that you verify each one has cleared.

Data entry errors

While we all try our best to minimise errors, inevitably a number will be mis-typed or a line will be skipped when entering transactions.

Hunting down an error can be time-consuming, so the best way to deal with errors is to double-check all entries in your ledger.

Bank fees

Bank fees are an unfortunate reality of doing business. A number of transactions have fees associated with them, including transfers between certain types of accounts.

Additionally, late payment fees, overdraft fees, and others can quickly snowball out of control.

Fortunately, many of these fees can be avoided with careful, regular bank account reconciliation. Part of the purpose of reconciling accounts is to catch issues that would incur these sorts of fees.

Fraudulent activity

Finally, fraudulent activity in a bank account can cause problems with reconciliation. But catching theft, embezzlement, and other forms of fraud are also some of the main reasons for reconciling accounts in the first place.

If you notice discrepancies in your accounts that can’t be resolved in other ways, you might need to consider this possibility.

To reduce the chances of theft occurring, consider spreading data entry and reconciliation among team members so that the same person isn’t performing each task – this provides a useful safeguard.

Automate bank reconciliation with MYOB

Bank reconciliation in accounting is an important process that ensures your accounts all match and no financial issues slip through the cracks.

It’s a fairly simple process of checking your business account against your bank statement. However, despite its simplicity, it can be time-consuming and tedious.

Fortunately, bank reconciliation doesn’t have to be done manually. MYOB’s bank feeds feature can automatically pull in your transactions and create a bank reconciliation statement.

This enables you to quickly compare items. All you need to do after that is approve them. This ultimately results in more time to focus on what matters most – providing an amazing experience for your customers.

Start a FREE 30-day trial with MYOB software today. 

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.