Bank Reconciliation Made Easy: A Step-by-Step Guide to Achieving Financial Accuracy

Introduction

Business owners regularly compare their records with bank transactions to ensure there are no errors. It is a best practice that enables them to check that their balance sheet numbers are accurate and match the bank statement. If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet.

A bank reconciliation is part of the month-end close process, which includes reviewing the company’s balance sheet, income, bank statements, expenses, intercompany trades, and other information. It is essential for maintaining accurate business financial records, which helps in tax filing and gives an overall idea of the company’s finances.

What Does Reconciliation of Bank Statements Mean and Why Is It Important?

Reconciliation of bank statements is the process of comparing the transactions recorded in the company’s accounting records with the transactions listed on the bank statement. This process involves matching the amounts and dates of each transaction to ensure that they are consistent across both sets of records.

The reconciliation of bank statements is a critical step in maintaining accurate financial records for any business, ensuring that the company’s accounting records are up-to-date and accurate. By reconciling bank statements regularly, business owners can identify any missing or duplicate transactions, bank errors, or fraudulent activity early on, before they pose significant challenges.

Bank reconciliation is a subset of the monthly, quarterly, and yearly close process and is not generally done on its own. Accountants spend a lot of time on this step to ensure the checks are thorough and even minute errors are spotted.

8 Steps To Perform Bank Reconciliation

Companies can designate several individuals to handle certain aspects of bank reconciliation, and they can complete reconciliations in a variety of ways. Here are 8 steps that will help you understand how to do bank reconciliation:

1. Acquire bank statements 

The first step is to obtain a detailed statement from the bank, which includes information about checks cleared and rejected by the bank, transaction charges, and bank fees.

2. Aggregate business records

Next, prepare the business records, which can be maintained on a software tool or manually on a spreadsheet. Compare the balance sheet’s ending balance with the bank statement’s ending balance.

3. Match deposits and withdrawals to the balance sheet

Check if the bank deposits and withdrawals match the records on the balance sheet. If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source. If the mistake is on the bank’s end, contact the bank and inform them.

4. Check income and expenses

Ensure that the income and expenses on the balance sheet match the bank statements to identify any unaccounted expenses or deposits.

5. Identify errors with check deposits

Check deposits can be challenging for businesses during reconciliation. Ensure that all checks recorded match the bank’s clearance list. If not, contact the bank immediately and inform them of the error. Also, check for any uncleared checks.

6. Check for other transactions

Miscellaneous debit and credit entries in the bank statements must be recorded on the balance sheet. If there are any differences, adjust the balance sheet to reflect all transactions.

7. Adjust balances

After checking all the critical items, adjust the cash balances to account for all expenses and transactions.

8. Final check

Reconcile all transactions and ensure that the closing balances match on the balance sheet and the bank statements. If not, repeat the process.

How Often Should You Reconcile Bank Statements?

The frequency of reconciling bank statements depends on the size and complexity of the business and its transaction volume. For larger companies with a high volume of transactions, it’s advisable to reconcile bank statements daily to ensure that any discrepancies or errors are promptly identified and corrected..

For smaller companies, it’s common to reconcile bank statements during the monthly or quarterly close process. However, there are situations where a bank reconciliation might be necessary at the earliest. For example, if a business identifies any suspicious activity or unidentifiable transactions, it’s essential to prepare a bank reconciliation immediately. Similarly, if customer payment checks on the balance sheet do not match bank records, a cross-check is necessary.

6 Common Errors to Avoid During Bank Reconciliation

Bank reconciliation is often prone to errors. Here are some of the most common errors to avoid during bank reconciliation:

1. Failing to record all transactions:

Not recording all transactions in the accounting system can lead to discrepancies between the balance sheet and the bank statement, making it difficult to reconcile.

2. Recording transactions incorrectly:

Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile.

3. Failing to account for bank fees and charges:

Bank fees and charges can accumulate and impact the balance sheet. Not accounting for these fees and charges during bank reconciliation can result in discrepancies between the balance sheet and the bank statement.

10% of all occupational fraud cases in small businesses are due to bank account reconciliation errors.

Source: Association of Certified Fraud Examiners

4. Starting with an incorrect opening balance:

Starting with an incorrect opening balance can lead to errors in the reconciliation process. It’s essential to ensure that the starting balance is accurate before beginning the reconciliation process.

5. Failing to identify and resolve discrepancies:

Discrepancies between the balance sheet and the bank statement must be identified and resolved promptly. Failure to do so can lead to further errors and make it challenging to reconcile the accounts.

6. Not reviewing reconciliation reports:

Reconciliation reports provide a summary of the reconciliation process and help to identify any errors or discrepancies. Failing to review these reports regularly can lead to errors in the reconciliation process.

By avoiding these common errors, you can ensure the accuracy of your organization’s financial records, make informed business decisions, and reduce the risk of financial issues. Regular reconciliation and review of financial records can help identify and resolve errors promptly, reducing the risk of financial issues.

Bank Reconciliation Example

On March 2, XYZ Co. opened a bank account with a $10,000 deposit. In the same month, the company wrote a $5,000 check and deposited $2,000 at the end of the day on March 31. As a result, the company’s books, or cash account, reflect a $7000 debit balance as of March 31. However, the bank statement for March 31 shows a balance of $4,975.

As different balances appear in the records and on the bank statement, the treasury must reconcile them. They must compare the details of each document to accomplish this. Assume the following:

• The bank did not process the $2,000 deposit made on March 31, so it is not shown on the bank statement.
• The bank charged a $25 service fee, but it was not recorded in the company’s books.
• The company has to cash one of the four $1,000 cheques written that month, and is absent from the bank statement.

The treasury team must fill in the missing transactions to reconcile the accounts so that the balances are equal. Follow these steps to achieve this:

• Reduce the cash account amount by $25 to reflect the bank’s service fee. This results in a new balance of $6,975.
• Increase the bank statement balance by $2,000 to reflect the deposit. Then decrease it by $1,000 to account for the unprocessed check. This leads to a balance on the bank statement of $6,975.

The bank statement and the company’s records now both show a $6,975 balance. Therefore, the bank statement has been reconciled.

Tips for Streamlining Your Bank Reconciliation Process

Here are some bank reconciliation tips:

1. Reconcile at least once every month

Cross-checking bank statements with the balance sheet at least once every month during the closing process is necessary. It helps identify discrepancies early and prevent errors from piling up. If the business has a high volume of transactions, reconciliations should be done more frequently.

2. Document the process

Keeping track of the entire reconciliation process is crucial for reporting errors and corrections to the management team later. Documentation also helps non-reconciliation employees cross-check data and refer back to source documents.

3. Record transactions immediately

Recording transactions on the general ledger or subledger as soon as they occur helps reduce errors and makes the reconciliation process more manageable. Using the source record of every transaction at the time of reconciliation, will give the most accurate results.

4. Know that banks might also make errors

If an error is identified during the reconciliation process, it’s not always at the company’s end. Banks can also make errors, and if the mistake can’t be identified, contact the bank.

5. Standardize the workflow

Standardizing the process with a set of steps to follow for reconciliation can make the process more organized and save time. This can be done by creating a checklist or using a reconciliation software tool.

6. Automate the process

Automation can solve the problem of time-consuming manual reconciliation and reduce errors. Cross-checking the bank statement and balance sheet can be done without human intervention using software tools.

Benefits of Automating Your Bank Reconciliation

Automating bank reconciliation can bring numerous benefits to a business, including increased accuracy, productivity, and cost savings. By using software tools to automate bank reconciliation, businesses can focus on other critical tasks and make informed business decisions based on accurate financial data. 

Automation of bank reconciliations enables a streamlined reconciliation process, reducing the risk of errors and discrepancies. Some key benefits of automated bank reconciliations are:

1. Auto-reconciles transactions

Solutions such as HighRadius’s cash management software can auto-reconcile transactions based on standard and user-defined tagging rules, saving time and reducing the risk of errors.

2. Real-time cash position

Cash management software allows businesses to gather real-time cash positions across the organization, helping to make better business decisions based on accurate data.

3. Time-saving

Automating reconciliation can cut down on time-consuming tasks, freeing up time for the team to focus on other critical tasks, boosting productivity and output.

4. Data integration

Cash management software can integrate with many data sources, ensuring consistency in data requirements and quality.

5. Cost reduction

Automating bank reconciliation can reduce the cost of processing and auditing. It can also save money by keeping a closer eye on the company’s finances and identifying any discrepancies or errors.

6. Scalability

Cash management software allows for scalability, making it easy to streamline the reconciliation process as the business grows.

7. Reduced human errors

Auto-reconciling transactions reduces human errors, such as keying inaccuracies and adds security to the reconciliation process.

How can HighRadius Help You with Bank Reconciliation?

Spending hours cleaning up exceptions, chasing unmatched items and still relying on spreadsheets and rule-based tools means businesses are still firefighting while their legacy systems hold them back. 

To help them accelerate the reconciliation process and ensure error-free financial close, HighRadius’ Record-to-Report software presents Agentic AI led account reconciliation and bank reconciliation solutions  that proactively matches transactions, resolve exceptions, and post entries—even before the finance teams get involved. These solutions offers: 

Balance Sheet Reconciliation

Automates certification, standardizes account formats, and ensures real-time visibility across entities. It auto-certifies low-risk accounts, eliminates offline trackers, and centralizes supporting documents. With built-in workflows and audit trails, teams close faster with fewer follow-ups.

Payroll Clearing Reconciliation

Matches payroll transactions with clearing accounts and posts adjustments automatically. It detects mismatches between payroll runs and clearing entries with precision. Teams eliminate time spent reviewing spreadsheets or reclassifying balances manually.

Intercompany Reconciliation

Syncs GL and IMS data, flags variances, and posts corrections in real time. Agentic AI learns how your teams resolve recurring mismatches across entities. No more back-and-forth emails or month-end reconciliation bottlenecks between divisions.

Credit Card Payment Reconciliation

Auto-matches daily credit card transactions to bank statements and flags mismatches instantly. It identifies duplicates, partial matches, or unposted items automatically. Exception volumes drop significantly, and reconciliations happen without delays.

Accruals Management

Creates, validates, and posts journal entries with zero spreadsheet dependency. AI determines accrual logic based on historical behavior and policy settings. The result: cleaner records, fewer manual postings, and faster period-end closes.

Deferred Revenue Reconciliation

Auto-calculates adjustments, classifies them, and posts allowance journals. It handles complexities in billing schedules, prepayments, and revenue recognition. No need for offline models—everything is traceable and audit-ready in one place.

Agentic AI in account reconciliation clears bottlenecks, not just flags them—helping finance teams reduce manual work and unlock 99% reconciliation accuracy. 

FAQs

1) How do you prepare a bank reconciliation statement?

To prepare a bank reconciliation statement, compare the bank statement balance to the balance in the company’s accounting records, identify any discrepancies, and make adjustments for any outstanding checks, deposits in transit, bank errors, or other items that may not be in the company’s records.

2) How to reconcile bank accounts?

To reconcile bank accounts, compare your bank statement to your records, noting any discrepancies. Adjust your records to match the bank statement, considering deposits, withdrawals, fees, and errors. Reconciling ensures accurate financial records.

3) What are the two items used to reconcile a bank account?

To reconcile a bank account, you use the bank statement, showing transactions processed by the bank, and compare it with the company’s cash records, accounting for any differences like outstanding checks or deposits in transit. This process ensures accurate tracking of financial transactions and balances.

4) What are the three methods of preparing bank reconciliation?

The three methods of preparing a bank reconciliation are the Adjusted Balance – adjustments are made directly to the balance; the Bank Statement – where adjustments are made to the bank statement balance; and the Balance Sheet Method – reconciling discrepancies between the bank and book balances.

5) How often should you reconcile your bank account ?

Reconciling your bank account should be done monthly to catch discrepancies early and keep financial records accurate. Businesses with high volume of transactions must reconcile their bank statements weekly or daily to manage cash flow efficiently.