How to Reconcile a Bank Statement

When you put your money in the bank, you would somehow think that the bank monitors the work of keeping track of all your transactions. Well, yes, they do that for you; and your bank statement is a document they provide for you to know the cash inflows and outflows made over time in your account monitored by your bank.

The What, Why, and How's of Reconciling a Bank Statement

While banks may provide you with an accurate report of your finances, remember that no one is perfect, and mistakes can be made. And you can even make mistakes like duplicating a transaction or paying a wrong credit card account. That is why it is vital to keep your bookkeeping records or cash books and reconcile them with your bank statements. Simply put, when you reconcile a bank statement with your cash books, you are comparing both records to find out if there are errors and be able to address them.

In an ideal setting, your bank statement should perfectly equalize your bookkeeping records for the same period to make sure that no money has gone “missing” from your business or savings. After all, every cent counts.

If you own a business, bank reconciliation is often done monthly once you receive your bank statement at the end of the month. On the other hand, large corporations that handle multiple accounts may reconcile on a daily or weekly basis. On the other hand, small companies may even reconcile their bank statements at least once every six months. When deciding how often you should reconcile your bank statements, decide based on the volume of your transactions.

Compelling Reasons Why You Should Reconcile a Bank Statement

Money is hard to earn whether you work, do business, or both. Reconciling your bank statement with your cash books may be additional work on your part, especially if you have multiple accounts, but there are certain benefits to it.

These include:

See your finances as it really is

It is important that when you look into your cash book, it is up to date and reflects reality. When you don’t have a clear picture of your finances because you haven’t reconciled your bank statement, including your credit card statements, you may end up spending money you don’t have or holding on to money you could’ve used to fuel your business or other investments.

Once all transactions in your bank statement vis-a-vis your cash books are accounted for, you can see and track any bank service fees you have been charged that you might be unaware of.

Track cash flow

When you reconcile your bank statement with your cash book, you see when the money goes into your business and when it goes into your bank account. This will also give you an idea of how to collect and spend your business’ income accordingly.

Validate data entry

Banks rarely make mistakes, but it happens. Reconciling your bank statement with your cash books enables you to see it and address it to the bank.

On the other hand, a bank error can happen if you make a mistake in the transactions you have arranged. For example, you have entered wrong amounts, duplicated entries, or you have entered the wrong account where the money should be deposited or credited.

Detect fraud

Reconciling your bank statement with your bookkeeping record won’t stop people from committing fraud to your account, but it will alert you when it’s happened. If you own a shared business account with a business partner, it is best to hire an external bookkeeper to handle your books. When someone outside your company handles your cash books, you are assured that no one is manipulating your books, and your employees or partners who are committing major frauds and scams (if there are any) that dent your financial standing will be put into light.

Reasons Why Your Bank Statement and Cash Book Might Not Disagree

Omissions

These refer to any transactions that already appear in your bank statement but have not yet been recorded in to your cash book. For example, lost receipts, bounced cheques, bank fees, and interest received.

Errors

Again, this can be made by your accountant, bookkeeper, or even you if you are the one handling your cash book. Banks rarely make errors in your bank statement, so it is best to check your cash book first when errors happen.

Timing Differences

These are transactions recorded both in the Bank Statement and the Cash Book in different periods. Typical examples of these include outstanding cheques and unrecorded deposits such as electronic bank transfers.

How to Reconcile a Bank Statement

To prepare your bank reconciliation, here are simple steps you need to take:

Step 1:

Get your bank records and bookkeeping records

Your bank records can be found in your online bank, or you can wait for the bank statement released by your bank. Your cash book should also be present.

Both records should be present because your goal is to make sure that the ending balance of both is similar over a particular period, for example, on a month-end.

Step 2:

Determine where to start.

If you don’t reconcile your bank statement regularly, it is best to start on the last time your books matched the ending balance in your bank account.

If you are up to date with balancing your bank statement with your cash book, proceed with the given month or time you usually reconcile your books—for example, every month end.

Step 3:

Review your bank deposits and withdrawals.

Go over your bank statement and see if all your deposits and withdrawals are accounted for. If a transaction item is missing, add it in. To avoid confusion, it is best to tick all the matching transactions in your books.

Step 4

Check your books against your bank statement.

Check the inflow and outflow of money in your books. Make sure that all transactions are both present in your bank statement and cash book. See if there are any discrepancies or unmatched items and try to figure out why that is.

Step 5

Adjust your bank statement.

Outstanding cheques, bank errors, or unrecorded deposits may be the reasons why your books don’t match. If this is true in your situation, make sure to make the necessary changes to your bank statement.

Step 6:

Adjust your cash book balance.

Make necessary changes to your cash book balance based on the fees, deposits, and withdrawals that you weren’t able to include in your original record that appears in your bank statement so that it accurately reflects all the transactions you have made.

Step 7:

Check if the adjusted totals match.

After matching records, making necessary adjustments, the ending balances of both your bank statement and cash book should be equal. Once you have a matching balance, your reconciliation process is complete. However, if they are still unequal, you should repeat the process, find the error, make necessary adjustments, and produce an ending balance that matches both your books.

Takeaway

It is not easy to reconcile your books, especially if you are new to doing this or you are handling multiple accounts that have plenty of transactions. However, when you do this, you can be sure that all your money is accounted for. This is especially important for breadwinners and entrepreneurs working to provide a better future for their families either in Canada or back home to their motherland.

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