Custom Image

A Step-by-Step Guide To Do Bank Reconciliation

What you’ll learn


  • What does it mean to reconcile your bank statement?
  • What are the steps to reconcile a bank statement? (with example)
  • How often should you reconcile bank statements?
  • Best practices for bank reconciliation
  • How can HighRadius help you with bank reconciliation?

Business owners regularly compare their records with bank transactions to ensure there are no errors. It is a best practice 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 getting an overall idea of the company's finances.

What does it mean to reconcile your bank statement?

Reconcile means to “make consistent with another.” So, reconciling your bank statements means ensuring that your balance sheet matches the transactions made in the bank. It helps businesses maintain accurate records and find out if there are any hidden charges or frauds (internally or externally).

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.

What are the steps to prepare a bank reconciliation? (with example)

There are multiple steps involved in the bank reconciliation process. Let’s take a look at them using an example.

steps to prepare a bank reconciliation

1) Acquire bank statements

The first step is to get a detailed statement from your bank. The statements will contain all the necessary information like checks cleared and rejected by banks, transaction charges, and bank fees.
Let’s say Company AY is doing its bank reconciliation and has asked for detailed bank statements. The ending balance on the bank statement is $100,000.

2) Aggregate business records

Once the bank statements are requested, it’s time to prepare the business records, which could either be maintained on a software tool or manually on a spreadsheet.
After aggregating its business records, the company found that its balance sheet shows an ending balance of $115,000.

3) Match deposits and withdrawals to the balance sheet

Now that you have all the data—check if the bank deposits and withdrawals match the records on the balance sheet. If there are any differences between the bank statement and your balance sheet, then cross-check if the mistake is at your end. If not, contact the bank and let them know.
The bank statements show withdrawals of $30,000 and deposits of $100,000, and so does the balance sheet.

4) Check income and expenses

See whether the income and expenses of your business maintained on the balance sheet match the bank statements. It will help you figure out if some expenses or deposits are yet unaccounted for.
The income and expenses are also matched on the balance sheet and bank statement.

5) Identify errors with check deposits

Check deposits can be a challenge for businesses at the time of reconciliation. It is possible that the bank rejected a check, or it got bounced. So, it’s essential to see whether all the checks that you have recorded match the bank’s clearance list. If not, then contact the bank immediately and let them know about the error. Also, check for any uncleared checks.
While comparing the bank statement and the balance sheet, it was visible that a $10,000 check wasn’t cleared by the bank yet.

6) Check for other transactions

Apart from checks and other significant balances, there are also many miscellaneous debit and credit entries in the bank statements. Ensure that these are recorded on the balance sheet as well. If there are some differences, adjust the balance sheet to reflect all the transactions.
There were some miscellaneous expenses on the bank statements involving bank charges, check processing costs, vendor costs, etc. These all added up to $5,000 and were not recorded on the balance sheet.

7) Adjust balances

After checking all the critical items, it’s time to adjust cash balances to ensure all expenses and transactions are accounted for.
The check balance was reduced on the balance sheet bringing the balance down to $105,000. And then, the miscellaneous expenses were adjusted to bring the total amount to $100,000.

8) Final check

Now that you have reconciled all the transactions, check whether the closing balances are the same on the balance sheet and the bank statements. If not, repeat the process.
After following the steps, we can see that the ending balance of bank statements and balance sheet match. So, the final check is complete.

How often should you reconcile bank statements?

The frequency of reconciling bank statements depends on the company and its transaction volume. If a large company has a considerable number of transactions daily, it could choose to reconcile bank statements every day.

For smaller companies, reconciling bank statements during the monthly close is normal. However, there are some situations where a bank reconciliation might be necessary at the earliest.

  1. If a business identifies any suspicious activity or unidentifiable transactions.
  2. If customer payment checks on the balance sheet do not match bank records, it calls for a cross-check.

Best practices for bank reconciliation

Here are the best practices businesses must follow while reconciling their bank statements.

Best practices for bank reconciliation

1) Reconcile at least once every month

Cross-checking your bank statements with your balance sheet at the end of every month during the closing process is necessary. It ensures that errors do not pile up and you identify any discrepancies at the earliest. Do note that if your business has a huge transaction volume, doing bank reconciliations more frequently would be a better idea.

2) Document the process

It is vital to keep track of the entire reconciliation process so you can refer back to the source documents and comparisons made. It helps report errors and corrections to the management team at a later date. Documentation also helps other employees not involved in the reconciliation process to cross-check the data.

3) Record transactions on the general ledger/sub-ledger immediately

Whether you use a sub-ledger to record daily transactions or post them directly to the general ledger, it is essential to record the transactions as soon as they occur. This helps reduce errors and makes the reconciliation process more manageable. Use the source record of every transaction for the same.

4) Know that banks might also make errors

If you identify an error during the reconciliation process, it is not always necessary that the error is at your end. Banks also make errors and if you are unable to figure out the mistake at your end, get in touch with the bank.

5) Standardize the workflow

Bank reconciliation can be time-consuming and takes a lot of employee bandwidth if the business doesn’t have a set process. Standardizing the process with a set of steps that are to be followed for reconciliation can make the process more organized and save time.

6) Automate the process

Manual reconciliation is time-consuming and prone to errors. Automation can solve this problem by cross-checking the bank statement and balance sheet without any human intervention.

How can HighRadius help you with bank reconciliation?

HighRadius Cash Application Software enables cash allocation for multiple global payment methods without manual intervention. It also enables a 95%+ match rate for email remittance and bank statements and handles exceptions such as no-remittance scenarios.

Some key features of our bank reconciliation solutions include automated bank statement processing, enrichment of inflow and outflow data, AR reconciliation, out-of-the-box integration with multiple ERPs, invoice matching, and email and web remittance automation. Businesses can save a lot of analyst time and improve productivity by automating this process.

FAQs

1) Who should reconcile bank statements?

Bank reconciliation is generally handled by owners in the case of small businesses. For enterprises, someone not involved in cash disbursements or cash receipt management does the reconciliation. It helps identify errors and ensures that cash managers do not indulge in irregularities or fraud.

2) How do you know if a bank reconciliation is correct?

If the ending balance of the bank statements and the balance sheet is the same, then the bank reconciliation is correct.

3) How do you treat errors in bank reconciliation statements?

After identifying the errors, if the mistake is at your end, then make the adjusting entries. If the bank has made some errors, get in touch with them.

4) What is the format of a bank reconciliation statement?

Bank reconciliation statements include an entity’s bank account details with its financial records to summarize all banking and business activity. The statement summarizes deposits, withdrawals, and other activities affecting the account for a specific period.

There’s no time like the present

Get a Demo of RadiusOne AR Suite for Your Business

Request a Demo

Request Demo Character Man

The HighRadius RadiusOne AR Suite is a complete accounts receivable’s solution designed for mid-sized businesses to put their order-to-cash on auto-pilot with AI-powered solutions. It leverages automation to fast-track key accounts receivable functions including eInvoicing & Collections, Cash Reconciliation, and Credit Risk Management powered by RadiusOne AR Apps to improve productivity, maximize working capital, and enable faster cash conversion. Affordable, quick to deploy, and functionality-rich: it is pre-loaded with industry-specific best-practices and ready-to-plug with popular ERPs such as NetSuite and Sage Intacct. The HighRadius RadiusOne AR Suite is designed to automate labor-intensive processes while streamlining credit and collections activities for faster AR processing, better cash flow and improved profitability.

Lightning-fast Remote Deployment | Minimal IT Dependency Prepackaged Modules with Industry-Specific Best Practices.

Automate Your Order-to-Cash Today!