How to Do a Bank Reconciliation: Learning the Basics

Each month, your bank sends you a statement that summarizes all the inbound and outbound cash transactions your business was responsible for over the previous statement period. This is a helpful service to be sure, but no bank is perfect, and your accounting records are far too important for you to simply trust an outside party’s record of your bottom line.

For this very reason, it’s important to learn how to reconcile a bank statement. Not only does it ensure that the bank’s records are accurate, it also provides a business with a sense of comfort its most treasured asset, cash, is being tracked carefully. Regular monitoring of cash is essential for a company’s financial success. If the world of accounting is somewhat of a mystery to you, basic software can help make the process much easier. Check out Udemy’s course on Quickbooks Pro 2014 to learn the basics. To better understand the format of bank statements and the process of reconciling them, take a look at this Udemy blog on the correct bank reconciliation statement format.

Adjust the Balance Per Bank Records

First, you must take the time to sort out all of the bank’s transactions and make sense of each one of them. The balance on the bank statement may not necessarily be (and often isn’t) what you show in your book records. To resolve this, simply figure up the transactions that are showing up in your book records but not yet on the bank statement.

These cash transactions include deposits outstanding and checks outstanding. Deposits outstanding are, simply enough, pending deposits your company has made but are not yet showing up as an official transaction on your bank statement, and thus, not reflecting on the total balance. Checks outstanding are just the opposite: outgoing money from your company to other entities that will soon be subtracted from your balance but do not yet show up in the posted transactions.

Take any deposits outstanding and add them to whatever the bank’s cash balance is listed at, and then subtract from that total however much cash your company has in checks outstanding, and you have corrected for the bank’s cash amount for that specific statement. This process may be easier if you record all transactions in question in Microsoft Excel; consider taking a course to master the basics of Excel if you need to brush up on your spreadsheet skills. For those with the most up-to-date Excel software, this advanced Excel course may be an even better fit.

Adjust the Balance Per Book Records

It isn’t just the bank that may be behind. Your company’s bank may have information about your company’s cash transactions that the book records don’t yet reflect, and this is the next step in the process of how to perform bank reconciliation. Things such as interest earned by the company, collections made on your behalf by the bank, service fees for having the account with the bank, and charges for bad checks that customers wrote to your company will all come into play here.

With these transactions, you will need to address each one individually and determine what the end result to your bottom line is. For instance, a service fee will reduce the total amount of

your company’s cash balance, while accumulated interest will cause the balance to go up to an amount that is more than your books indicated it would be at.

Reconcile the Company’s Balance

Finally, you will need to take the information you’ve gathered from the previous two steps and come up with an accurate final balance that incorporates both the bank’s information as well as the transactions in your company’s book records. This is your company’s cash balance based on recorded book transactions plus whatever extra information you learned from the monthly bank statement.

At this point, you’ll want to compare the adjusted balances from each entity. For example, if the bank showed a balance of $1,000 before reconciliation with outstanding deposits of $500 and checks outstanding of $250, the adjusted balance would equal $1,250 after reconciliation.

Likewise, the book records may show a pre-reconciliation balance of $1,500, but once adjusting for charges like a $50 service fee and a $200 bad check that the company never actually got the funds for, the post-reconciliation amount would come out to $1,250. No matter what transactions are involved in this process, the goal of bank reconciliation is simply to figure up missing dollar amounts from the bank statement and book records and ensure that the both add up to the same total on each side.

In doing so, you will ensure that your company’s cash level is accurately represented, and you will not have to worry about any unpleasant surprises in future months. By simply relying on only bank statements or only your company’s records, critical financial information could be slipping under the cracks, and no business needs to contend with issues such as those.

Record Journal Entries

Record any items that increased your company’s cash with a debit to Cash, and record any items that decreased your company’s cash value with a credit to the Cash account. Ultimately, the end result is that the amount of cash that was adjusted after reconciling both the bank statement and book records should come out as the same number.

Other accounts aside from cash be may be affected by these journal entries. For instance, that $200 bad check mentioned above may be a credit to the Cash account, but it’s also a debit to the Accounts Receivable account, as that money is technically still an asset because it is owed to the company. Likewise, a purchase for office equipment may have reduced the Cash account, but it is a debit (increase) for the Equipment account, another asset.

Be sure that all journal entries are properly notated, as Cash is not the only affected account in the bank reconciliation process. Even if you do know how to perform bank reconciliation properly, the whole task is useless if the subsequent journal entries are not recorded properly, as your company records will be off regardless. By carefully reconciling your bank statement with your company’s book and recording the relevant journal entries, you will be doing your part to ensure that your business’s finances are in good condition.

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Category: Forex

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