Bank reconciliation is an important step in the accounting process that provides an internal control for businesses and organizations.
It is a valuable tool to substantiate cash on the balance sheet by identifying and adjusting discrepancies between bank statements and internal accounting records, whether they are caused by human error, timing, or fraud.
Companies perform bank reconciliation by comparing their own financial statements with the records they receive from the bank.
This is an important process to verify the integrity of those statements and correct any errors or discrepancies that may occur.
While most banks employ digital technology to effectively manage accounts and transactions, errors or discrepancies can occur for a number of reasons.
All banks provide statements for their clients’ accounts in paper and digital form, usually on a monthly basis.
The statements show all activity—debits and credits—for an account. While they are generally very accurate, errors may occur on the part of the bank or the business.
Banks and businesses do not record transactions synchronously, so human error can occur. Payments or deposits that have been recorded by the bank may not have been journaled into the business’s accounting records.
Conversely, the business may have entered transactions that have not yet been processed by the banks. It’s important for the business to reconcile these discrepancies on a regular basis to ensure the balance sheet reflects an accurate cash balance before that money is applied to the business in other ways.
Just as banks provide statements to record all transactions in an account, businesses record all transactions in the general ledger.
Cash receipts and disbursements—which are recorded in the cash book, a subsidiary of the general ledger—will include bank deposits and withdrawals.
As part of the bank reconciliation process, it’s important to reconcile these journal entries with the transactions recorded in the bank statements to ensure the integrity of cash on the business’s balance sheet. Adjusting journal entries are inputted into the business’s accounting records at the end of the accounting period to record any income or expenses identified in the bank reconciliation process.
Bank reconciliation compares the account balance recorded by the bank with that maintained in the business’s accounting records. After performing the bank reconciliation and making all necessary adjusting journal entries, the two balances should be equal.
Reconciliation may identify transactions that were not yet recorded by the business. For example, banks may charge fees for a variety of activities, including maintenance or service fees, ATM charges, and late fees. A business may not have recorded these fees, and when that occurs, a bank reconciliation will help identify and record the fees for the appropriate accounting period.
Similar to fees, banks may also charge penalties for such things as over-drafting a checking account, a returned check, or an early withdrawal from a CD. These also may not have been recorded by the business. A bank reconciliation will identify these transactions so they can be appropriately entered into the business’s records.
Finally, bank reconciliation is an important internal control against fraud. It can help identify discrepancies that are created by fraudulent activities and remedy them before they become widespread and difficult to correct.
Accounts Receivable Automation
Credit Risk Management
Credit Utilization Ratio
Days Sales Outstanding (DSO)
Debits & Credits
Depreciation Journal Entry
Financial Operations Management
Financial Operations Transformation
Financial Performance Analysis
Month End Close Process
Robotic Process Automation (RPA)
The following steps are included in the bank reconciliation process:
Gather all pertinent bank statements.
Gather the corresponding accounting records for the business.
Review all deposits and withdrawals on the bank statements.
Reconcile this with the income and expenses in the accounting records.
Adjust the bank statements by adding deposits or checks that have not yet been recorded by the bank.
Adjust the cash balance in your accounting records by including any transactions from the bank statements that have not been entered.
Compare the end balances. After you have performed this process, both balances should match.
A business may have journaled transactions that have not yet been recorded by the bank. Conversely, the bank may have recorded transactions that the business may have overlooked.
Bank reconciliation helps correct those discrepancies. This ensures the integrity of the business’s financial records, and in some cases, may even identify errors on the part of the bank.
Bank reconciliation is an especially valuable tool to detect fraud. It can help detect fraudulent activities by employees, such as altered check amounts or fictitious vendors.
Bank reconciliation ensures that bank fees and penalties do not go unrecorded. Banks can impose charges for a variety of reasons that may not be recorded, such as late fees or insufficient funds. Bank reconciliation will ensure that these charges are properly entered into the business’s accounting records.
Bank reconciliation is typically done on a monthly basis after bank statements are received, but it may be done more frequently, depending on the business and the number of transactions.
Businesses that have large volumes of transactions may perform bank reconciliation as often as weekly or even daily. They can gather the data they need by checking online banking records even before a monthly statement has been produced.
Request a demo with us and see how you can standardize, control, and streamline account reconciliations. Accountants can quickly compare general ledger, bank, and other data, investigate discrepancies, attach supporting documentation, and take required actions from an intuitive, unified workspace.