These charge payments are usually not recorded in the bank’s customer records. It does not appear on the month-end bank statement and is not a reconciling item in the month-end reconciliation if it has not yet cleared the bank by the end of the month. Bank reconciliation also helps you identify fraud or theft and intervene early. If someone has withdrawn funds without your knowledge or consent, bank reconciliation will clue you in.

For example, if a check is altered, the payment made for that check will be larger than you anticipate. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money. One reason for this is that your bank may have service charges or bank fees for things like too many withdrawals or overdrafts.

Who’s responsible for bank reconciliations?

We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you). If the indirect method is used, the cash flow from the operations section is already presented as a reconciliation of the three financial statements. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts.

With bank reconciliation, you and your stakeholders can make decisions based on your bank records and financial statements, understanding both are accurate. You can also perform bank reconciliation by hand, meaning you’d manually compare your bank statement to your general ledger transaction by transaction. Or, if you use accounting software to track your business’s finances and generate financial statements, the software should have a built-in method to speed up bank reconciliation. Bank reconciliation means comparing your bank statement’s listed transactions with your business’s internal records, then adjusting your internal accounting records to ensure they’re accurate. It’s also the foundation of small-business accounting and bookkeeping, so you’ll want to familiarize yourself with the process as soon as possible—you’ll be doing it pretty often. One of the most common causes of discrepancies in bank reconciliations is delays in deposit and transaction processing.

Some reconciliations are necessary to ensure that cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement. Cash flow can be calculated through either a direct method or an indirect method. GAAP requires that if the direct method is used, the company must reconcile cash flows to the income statement and balance sheet. Performing immediate bank reconciliations for large cash amounts or suspicious transactions further increases your ability to catch fraud and error.

1. Bank reconciliation statements compare transactions from financial records with those on a bank statement.
2. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February).
3. If the accounts don’t match, you’ll need to find the source of the financial discrepancy, repair it, and compare the accounts again to see if they balance.
4. Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement.

Step 1: Find the starting balance

The statement itemizes the cash and other deposits made into the checking account of the business, as well as any expenses paid by the business. This includes everything from wages and salaries paid to employees to business purchases like equipment and materials. Bank statements also show expenses that may not have been included in financial statements, such as bank fees for account services. For instance, if you use QuickBooks Online, you’ll use the reconcile function to pull up all your bank transactions during a period of time you specify. QuickBooks then shows you all the transactions you entered into the software during the same time period. You’ll compare the two lists and check a box next to each QuickBooks transaction that also shows up on your bank statement.

Adjusting Discrepancies Between Books and Bank

Any credit cards, PayPal accounts, or other accounts with business transactions should be reconciled. In single-entry bookkeeping, every transaction is recorded just once rather than twice, as in double-entry bookkeeping, as either income or an expense. Single-entry bookkeeping is less complicated than increased investment in subsidiary journal entry double-entry and may be adequate for smaller businesses.

Step 3: Adjust the cash balance

We do not include the universe of companies or financial offers that may be available to you. To help with the transaction matching aspect of reconciliations, many firms use spreadsheet-based systems. These tasks will be performed on a monthly, weekly, or even daily basis, depending on the needs of the business and the corresponding transaction volumes.

How often should you perform bank reconciliation?

The balance recorded in your books (again, the cash account) and the balance in your bank account will rarely ever be exactly the same, even if you keep meticulous books. When they draw money from your account to pay for a business expense, they could take more than they record on the books. If, on the other hand, you use cash basis accounting, then you record every transaction at the same time the bank does; there should be no discrepancy between your balance sheet and your bank statement. If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below). If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you. In double-entry accounting, each transaction is posted as both a debit and a credit.

Hopefully, once you’ve dealt with deposits in transit, outstanding checks, interest payments, and bank fees, your bank statement and internal accounting records will match. Resolving the issue could mean paying a bill, depositing a check, or entering a forgotten transaction into your general ledger. Add the amount of deposits in transit and subtract the amount of any outstanding checks from your bank statement’s cash balance to arrive at (and record) an adjusted bank balance. Similarly, add any interest payments or bank fees to your business’s cash accounts to find your adjusted cash balance.

Discrepancies in bank reconciliations can arise from data processing errors or delays and unclear fees at the bank. Unpredictable interest income may also be a functional expense allocation challenge when calculating financial statements, which can lead to challenges during a bank reconciliation. Maintaining accurate financial records makes it easier to organize your taxes when it comes time to file. Regular bank reconciliation saves you from having to review a full year of financial records—instead, you can quickly consult your reconciliation statements to review any required information. Bank reconciliation isn’t just important for maintaining accurate business finances—it also ensures your customer and business relationships remain strong. Regular bank reconciliation double-checks that all payments have been accurately processed.

For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. For the most part, how often you reconcile bank statements will depend on your volume of transactions. Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them.

Similarly, entries of differences that have led to increased cash book balance are deducted from the balance as per the cash book. A bank reconciliation statement might become a nuisance if you run a large and thriving firm with a lot of transactions using a single bank account. When they don’t, it’s time to conduct an investigation and, if necessary, make improvements. The bank statement contains the bank’s record of all transactions affecting the entity’s bank account throughout the previous period.