Managing your business bank account may be the last thing on your to-do list. But, you don’t want to overlook the importance of bank statement reconciliation. Bank statement reconciliation helps you catch and correct errors before they damage your finances.
What is bank statement reconciliation?
Bank statement reconciliation means comparing your bank statement to your accounting books. You want the bottom line of your bank statement to match the bottom line of your books.
Typically, you record check and cash transactions in a check register. The check register is a part of your general ledger, where you keep your main accounting records.
The bank keeps a similar record of your business checking account. The bank issues you a statement to reflect all activity in the account each month.
When you receive your statement, match the transactions to your check register. Checking your bank statement against your account register helps you keep accurate accounting records.
How do you reconcile a bank statement?
The bank statement reconciliation process is simple. You compare the transactions in your bank statement to your check register for the same period. The statement and check register should have the same number of transactions. Every line item in the statement should match a line item in your check register.
The bank statement and your check register may not initially match. All the transactions entered in your check register do not appear on the bank statement in the same period. And, all transactions in your bank statement do not appear in your check register.
For example, you write a check to a vendor today. You enter the amount in your check register with today’s date and adjust the balance.
But, the vendor waits until next month to cash the check. A bank statement includes that transaction when the supplier cashes the check, not when you write it. That means that while the check is a transaction in your check register this month, it is not a transaction on the bank statement.
For bank account reconciliation, you must carefully track your business’s transactions. Once you organize your books, follow these three steps for bank statement reconciliation.
Step 1: Adjust the bank statement balance
All your transactions for the month may not be on your bank statement. Some transactions might have occurred too close to the statement date. Those transactions will appear on the next statement, but are already recorded in your check register.
You need to adjust the balance of the bank statement for these transactions. Here are two items that might affect your bank statement balance:
Deposits in transit
You might have accepted checks on the closing date of the bank statement. If you deposited the checks later in the day, the transaction would not appear on the statement. Instead, it will appear on the next bank statement.
Though the transaction is not in the bank statement, it is in your check register. You record money gained as soon as you receive it. So, the transaction appears in your check register.
Increase the bank statement balance by the total deposits in transits. That way, the bank statement reflects the amount of cash in your account.
If you wrote checks in recent days before the statement was issued, it’s likely they haven’t cleared. The checks do not appear on your current bank statement. These checks are outstanding checks.
The checks are not recorded in the bank statement. But, outstanding checks are recorded in your check register. You record money you pay as soon as you write the check.
You need to adjust your bank statement to reflect the outstanding checks. Subtract the number of outstanding checks from the bank statement balance.
Step 2: Adjust the check register balance
Your bank statement may include items that you didn’t record in the check register. Just as you adjusted the bank statement balance, you also need to adjust your books. These items might affect your check register:
Bank service fees
The bank charges you fees for processing your checking account activities. These activities might include accepting deposits, electronic transfers, ATM withdrawals, or debit card transactions. The bank might also charge you for overdrafts or stop payment orders.
The bank deducts fees from your bank statement balance. But, you have not recorded the bank fees in your check register.
You need to adjust your books to correspond with the bank statement. Subtract bank fees from your check register to match the bank statement balance.
An NSF (non-sufficient funds) check cannot be cashed because your account has low funds. If you wrote an NSF check, you wrote a check for a larger amount than the amount in your checking account.
When you write an NSF check, the check returns to your bank without being deposited. Your bank decreases your checking account by the amount of the NSF check plus a fee. The deduction shows up on your bank statement.
You need to adjust your check register to match the NSF check on the bank statement. Subtract the amount of the NSF check and the fees from the check register.
You might earn interest on the balance of your bank account. The interest earned appears on your bank statement.
You need to adjust your books to reflect the interest earned. Add the amount of interest earned to the check register.
There may be other items added to or deducted from your bank statement balance that are not in your books. Compare the bank statement to your check register to see if you need to make additional adjustments.
Include missing entries in your check register once you verify they are authorized transactions. If you see a suspicious charge that you cannot verify, contact your bank immediately.
Step 3: Compare the adjusted balances
Now that you have adjusted your bank statement and check register, compare the balances. The two balances should be the same amount.
If the sums are different, go through each entry one by one to find the discrepancy. Mark each verified entry as you go. Double check each adjustment to make sure you documented every transaction in both records. Your bank can help you find and correct errors if you need further help.
Once the balances match, they should reflect an accurate, current picture of your bank account balance. You should try to reconcile your bank account every month. Bank account reconciliation will help eliminate surprises and show you where your business’s finances stand.
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This article was updated from its original publication date (2/18/2015).