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 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 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. It helps to ensure that the company’s accounting records are up-to-date and accurate, which is essential for making informed business decisions. By reconciling bank statements regularly, business owners can identify any missing or duplicate transactions, bank errors, or fraudulent activity early on, before they become significant problems.

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.

How to Do Bank Reconciliation?

Companies can designate several individuals to handle certain aspects of bank reconciliation, and they can complete reconciliations in a variety of ways. The basic sequence, of preparing a bank reconciliation, consists of the following eight steps.

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 identified and corrected promptly.

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.

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.

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, businesses can ensure the accuracy of their financial records, make informed business decisions, and reduce the risk of financial issues. Regular reconciliation and review of financial records can help to identify and resolve errors promptly, reducing the risk of financial issues.

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. Use the source record of every transaction.

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 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 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.

The 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.

How does cash management software improve bank reconciliations?

Cash management software can improve bank reconciliations by automating and streamlining the process, reducing the risk of errors and discrepancies. Here are some of the advantages of automating bank reconciliation with cash management software:

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 audit costs. 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?

HighRadius offers autonomous cash management software that helps businesses optimize cash flow management and reduce reconciliation delays. With HighRadius, you can enjoy continuous global cash visibility, updated balances by entity, bank, and currency, and rolling short-term cash position keeping.

Our product also automates the reconciliation of bank statements and offers centralized bank account administration, allowing you to track and manage a consolidated list of all bank account information and signatories. By using HighRadius’s cash management software, you can streamline your bank reconciliation process, improve your financial operations, and make better-informed decisions based on accurate financial data.

With HighRadius, you can improve your bank reconciliation process, optimize your cash flow management, and reduce the risk of errors and discrepancies. So why wait? Try HighRadius’ advanced features today and see how they can help you take your financial operations to the next level.

FAQs on Bank Reconciliation:

1. What are the three methods of preparing bank reconciliation?

The three methods of preparing bank reconciliation are the “Bank Statement Method,” the “Balance Sheet Method,” and the “Adjusted Balance Method.”

2. 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.

3. 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.