For those of us in accounting, reconciling a bank statement is one of those tasks that you know needs to be done but rarely gets the spotlight. Sure, it may not be the most exciting part of the job, but it’s the backbone of keeping accurate financial records.
The real magic happens when everything lines up—no bank errors, no missing entries—and you can confidently say your company’s cash records match the bank accounts. Whether you’re managing the finances for a small business or a nonprofit, getting your bank reconciliation right is critical to informed decision-making and clean financial reporting. Let’s walk through how to reconcile a bank statement and share a few additional tricks to make your life easier.
What Is Bank Reconciliation?
In simple terms, bank reconciliation is the process of matching the cash balance in your company’s accounting records with the balance shown in the bank’s statements. It involves adjusting for outstanding checks, deposits in transit, bank fees, and other reconciling items to confirm that your company’s financial records accurately reflect your actual cash position.
Why Is Bank Reconciliation Important?
In the world of accounting, accurate financial records are everything. They’re not just important for day-to-day operations—they’re the foundation of informed financial decisions, effective cash flow management, and long-term planning. Let’s look at how bank reconciliation plays an important role:
- Keeps Financial Records Accurate: It’s critical for keeping your financial records up-to-date, helping you track finances and make informed decisions.
- Identifies Discrepancies: The bank reconciliation process reveals bank errors, unrecorded transactions, and potential fraudulent transactions, preventing small issues from escalating.
- Improves Cash Flow Oversight: Aligning bank accounts with a company’s accounting records provides a clearer view of the cash balance, helping you manage operational costs and unexpected expenses.
- Boosts Financial Reporting: A well-executed bank reconciliation contributes to accurate, transparent financial reporting, which is essential when presenting records to auditors or stakeholders.
- Facilitates Audits: Auditors appreciate organized and accurate records. Routine bank reconciliations help provide clear documentation, reducing audit time and complications.
- Reduces Risk of Errors: Regularly reconciling bank accounts helps catch accounting errors, such as unrecorded outstanding checks or missed transactions, keeping your financial records reliable.
- Strengthens Cash Flow Management: Keeping up with bank reconciliations helps maintain control over cash flow and avoid surprises in business operations.
A successful bank reconciliation process leads to clearer financial reporting, making it easier to present clean records to auditors, stakeholders, or anyone else relying on your financial data.
How Often Should Bank Reconciliation Be Done?
At a minimum, bank reconciliations should be completed monthly during the financial close process. This gives you enough time to catch any bank errors, outstanding checks, or discrepancies between the bank balance and your cash account before they start to cause bigger issues. Think of it like a financial check-up—waiting too long to reconcile can lead to small mistakes snowballing into something much harder to fix down the line.
For businesses with a high volume of financial transactions, waiting until the end of the month might feel like an eternity. In these cases, weekly or even daily reconciliations might be the better move. This helps you keep a closer eye on cash flow, catch any fraudulent transactions quickly, and stay on top of deposits in transit or uncleared checks. Plus, if you’re working with slim margins or managing multiple bank accounts or multi-entity reporting, frequent reconciliations make it easier to avoid any cash flow surprises.
The frequency really depends on the size and complexity of your business. For smaller businesses, monthly is usually enough to keep things running smoothly. But if you’re dealing with a lot of daily transactions, frequent reconciliations can be the difference between confidently running operations and scrambling to fix a surprise shortfall.
At the end of the day, the more often you reconcile, the less room there is for errors. And let’s face it, no one enjoys the panic of discovering a mismatch between the company’s accounting records and the bank statement—frequent reconciliation keeps that stress at bay.
How to Reconcile a Bank Statement: 7 Steps
Reconciling a bank statement may seem like a tedious task, but breaking it down step by step can make it much easier. Here’s how to go through the process effectively:
1. Obtain Your Bank Statement
Start by getting the most recent bank statement from your banking provider. This could be a physical copy or a digital version, depending on how your bank provides statements. Make sure you have access to all necessary statements, especially if you’re reconciling multiple bank accounts. This document will serve as the basis for the reconciliation.
2. Compare Beginning Balances
Before diving into transactions, check the beginning balance on your bank statement and compare it with the cash balance shown in your company’s accounting records at the start of the period. If these balances don’t match, you’ve got a problem right from the get-go, and you’ll need to investigate why they don’t align. Often, it’s a sign that a previous reconciliation wasn’t done correctly, so make sure to resolve this before moving on.
3. Mark Off Cleared Transactions
Next, go through each transaction listed in the bank statement and mark off the ones that match the transactions recorded in your company’s books. This includes bank deposits, withdrawals, and transfers. For every transaction in the bank statement, ensure it’s been accurately recorded in your company’s accounting records. If you find a transaction that doesn’t match, it could indicate a missing transaction or a bank error, which you’ll need to address.
4. Adjust for Outstanding Checks
After matching the transactions, it’s time to account for any outstanding checks—these are checks that you’ve issued but haven’t yet been cashed or processed by the bank. These checks won’t appear on the bank statement, but they’re still part of your company’s cash records. Make a list of all outstanding checks and deduct their total from the bank balance when preparing your bank reconciliation statement.
5. Account for Deposits in Transit
Similar to outstanding checks, deposits in transit are amounts you’ve recorded in your books but haven’t yet been processed by the bank. This often happens at the end of the month when deposits are made after the bank statement closing date. Add these deposits in transit to the bank balance to ensure they’re properly accounted for in the reconciliation.
6. Adjust for Bank Fees and Interest Income
Banks often apply fees, such as bank service fees, for maintaining accounts or processing transactions, as well as crediting interest income on certain accounts. These fees and interest payments might not be reflected in your company’s accounting system yet, so make sure to adjust your records for any bank fees or interest income that appear on the bank statement. Deduct the fees and add the interest income to your books accordingly.
7. Review the Adjusted Bank Balance
Once all transactions have been accounted for—including outstanding checks, deposits in transit, bank fees, and interest income—you should be left with an adjusted bank balance. This balance should match the cash balance in your company’s accounting records. If everything matches up, congratulations, you’ve successfully completed the reconciliation! If not, you’ll need to dig deeper to identify any discrepancies, such as missing transactions or accounting errors, until both balances align.
By following these steps methodically, you can complete the entire reconciliation process without missing any important details. Regular bank reconciliations keep your company’s financial records accurate, allowing you to keep a clear view of your cash flow and avoid any surprises down the line.
Understanding the Formula for Bank Reconciliation
Now that you’ve gone through the steps of matching transactions, it’s important to understand how the bank reconciliation formula works. The goal of reconciliation is to make sure the balances from your bank statement and your accounting records match after adjusting for any timing differences or errors. Let’s break it down in simple terms:
Adjusted Bank Balance Formula
This is how you adjust the balance shown on your bank statement:
- Bank Statement Balance: The balance shown by the bank.
- Deposits in Transit: These are deposits you’ve made that the bank hasn’t recorded yet. Add them because the bank doesn’t know about them yet.
- Outstanding Checks: These are checks you’ve written that haven’t cleared the bank yet. Subtract them because the bank still shows the money in your account.
- Bank Errors: Mistakes the bank made, like recording a transaction incorrectly. You’ll add or subtract these depending on the nature of the error.
Adjusted Bank Balance = Bank Statement Balance + Deposits in Transit – Outstanding Checks ± Bank Errors
Adjusted Book Balance Formula
Next, you adjust the balance in your company’s accounting records (your book balance):
- Book Balance: This is the balance shown in your company’s cash account.
- Bank Fees: These are fees the bank has charged but you haven’t recorded yet. Subtract them because they reduce your available cash.
- Interest Earned: This is interest the bank has added to your account that you haven’t recorded yet. Add it because it increases your cash balance.
- Book Errors: Mistakes in your own records, like entering a wrong amount. Add or subtract these based on the error.
Adjusted Book Balance = Book Balance – Bank Fees + Interest Earned ± Book Errors
Bringing It All Together: Reconciliation
The goal is to make sure that:
Adjusted Bank Balance = Adjusted Book Balance
When both adjusted balances match, it means your bank’s records and your company’s records are accurate after accounting for any timing differences and errors. This final step is crucial for maintaining accurate financial records and keeping your cash flow clear.
How to Do Bank Reconciliation with an Example
Let’s say your bank statement shows a bank balance of $5,000, but your company’s accounting records reflect a cash balance of $4,650. The reconciliation process will help identify the differences and bring both balances into alignment.
- Start by Reviewing the Transactions
First, you compare the bank statement with your company’s accounting records. You check all deposits, withdrawals, and payments listed on both sides. You find that there are some timing differences causing the two balances to differ. - Identify Outstanding Checks
During your review, you discover that a check for $400 has been recorded in your company’s accounting records, but it hasn’t cleared the bank yet. The bank balance still shows the amount as available because the check hasn’t been processed by the bank. - Account for Deposits in Transit
You also identify a deposit in transit of $50. This deposit was made near the end of the month but hasn’t yet been processed by the bank. As a result, it’s not reflected in the bank statement, but it’s already included in your cash balance. - Make the Adjustments
To reconcile the balances, you adjust the bank balance by accounting for the timing differences:- Subtract the $400 outstanding check from the bank balance (because the bank still includes it as available). Add the $50 deposit in transit to the bank balance (because the bank hasn’t recorded it yet).
- Bank statement balance: $5,000
- Subtract the outstanding check: $5,000 – $400 = $4,600
- Add the deposit in transit: $4,600 + $50 = $4,650
- Finalize the Reconciliation
After making the adjustments, your adjusted bank balance is $4,650. This now matches the cash balance shown in your company’s accounting records, meaning the reconciliation is complete. Both the bank’s records and your company’s records are now fully aligned.
What If the Balances Still Don’t Match?
If your adjusted balances still don’t match, it means there’s likely another issue, such as a bank error or a missing transaction in your company’s accounting records. At this point, you would go back through your transactions to find what might have been missed. Sometimes, small errors like incorrectly recorded bank fees or misentered amounts can cause lingering discrepancies.
5 Common Errors to Avoid in Bank Reconciliation
Even the most seasoned accounting professionals can encounter a few pitfalls during the bank reconciliation process. These common errors are easy to overlook but can cause significant discrepancies between your bank statements and your company’s accounting records. Let’s dive deeper into each potential error and how to avoid it.
1. Missing Transactions
One of the most frequent issues in bank reconciliation is the presence of missing transactions. This happens when a transaction appears on the bank statement but hasn’t been recorded in your company’s books—or vice versa. It could be a deposit you forgot to log or a payment that didn’t make it into your accounting system. To avoid this, take the time to thoroughly cross-check all transactions listed on your bank statement with your financial records. Financial statement preparation is a really important part of this process. Look at every deposit, withdrawal, and bank transfer to make sure nothing has slipped through the cracks.
2. Bank Errors
Yes, banks make mistakes too! Bank errors can take various forms—maybe a check was cleared for the wrong amount, or a transaction was processed twice. Sometimes banks even apply incorrect bank fees or fail to record a deposit in transit properly. If you notice something that doesn’t match up during reconciliation, don’t hesitate to contact your bank to get clarification or a correction. Banks generally have systems in place to resolve errors, but you’ll need to identify the issue first.
3. Outstanding Checks
Outstanding checks—those that have been issued but not yet cleared—are another common stumbling block during bank reconciliations. These checks might still be floating out there for days or even weeks before they’re cashed, so they won’t show up on your current bank statement. When preparing your bank reconciliation statement, make sure to account for all outstanding checks by reviewing your company’s internal check register and subtracting these amounts from your bank balance. Missing this step could cause your cash balance to appear overstated.
4. Misrecorded Bank Fees
Bank fees—such as maintenance charges, wire transfer fees, or overdraft fees—are often small amounts, but failing to record them correctly can cause discrepancies between your bank balance and your internal cash balance. Make sure to check for these fees on your bank statement and update your records accordingly. Keep in mind that some fees are charged automatically and may not be entered into your accounting system until you review your bank statements, so this step is crucial for accounting accuracy.
5. Duplicate Entries
Duplicate entries occur when the same transaction gets recorded more than once in your company’s financial records. This is an easy mistake to make, especially when there are manual processes involved. For example, you might enter a payment twice or record a deposit in transit that was already processed by the bank. The result? Your cash balance appears inflated, causing confusion during the reconciliation. Be diligent about reviewing each transaction in your company’s accounting records to make sure there are no duplicates, and cross-check them against the bank statement to avoid this error.
By keeping an eye on these common issues, you’ll significantly reduce the chances of running into trouble during bank reconciliation. A careful review and attention to detail go a long way in preventing these errors from disrupting your financial records and keeping your cash flow in order.
5 Best Practices for Maintaining Accuracy After Bank Reconciliation
Reconciling your accounts is just the beginning—ensuring that your financial records remain accurate and consistent over time is equally important. By following these best practices after completing your bank reconciliation, you can avoid future discrepancies and keep your records clean.
1. Document and Archive Reconciliation Reports
After each reconciliation, it’s important to document the results. Saving detailed reconciliation reports not only helps with future audits but also provides a reference point if you ever need to investigate an issue. Keep these reports organized and easily accessible for your accounting team and auditors.
2. Regularly Review and Update Internal Controls
Even if your bank reconciliation process is automated, it’s essential to review and update your internal controls periodically. Make sure that any changes in banking procedures or company policies are reflected in your reconciliation process to avoid unexpected errors.
3. Audit Your Reconciliation Process
Perform periodic audits of your reconciliation workflow. This doesn’t have to be as formal as a financial audit, but conducting internal reviews helps ensure that every step is being followed correctly and that any recurring issues are addressed. For example, if certain bank errors or accounting errors appear frequently, an audit can help you identify the cause and prevent them from happening again.
4. Reconcile High-Risk Accounts More Frequently
Some accounts may require more frequent reconciliation due to higher transaction volumes or greater financial risk. It’s a good practice to identify any high-risk accounts and review them more often to catch discrepancies early.
5. Train Your Team for Consistency
Making sure that everyone on your accounting team follows the same reconciliation procedures is critical for maintaining accuracy. Provide ongoing training for your team to keep everyone updated on best practices and software improvements. Consistency in how your team reconciles accounts reduces the risk of errors and discrepancies.
By implementing these best practices, you’ll keep your company’s financial health in check, avoid future errors, and make the audit process smoother. Consistent monitoring, proper documentation, and strong internal controls are all essential steps in building an error-free reconciliation process.
How Automation Helps with How to Reconcile a Bank Statement
Let’s be honest—manual bank reconciliations can feel like a slog, especially when you’re managing a growing pile of transactions. The good news is that automation can take a lot of that weight off your shoulders. Accounting professionals know the drill: sifting through pages of bank statements and cash balances, trying to spot where things don’t match. But what if software could handle all that? Here’s how automation makes your life easier:
- It Saves You Hours of Work: We all know how long a manual bank reconciliation can take—hours of matching transactions, double-checking for missing transactions, and making sure every penny is accounted for. Automating the financial close process saves a huge amount of time. Instead of playing transaction detective, software automatically pulls in bank statements and matches them with your accounting records in seconds. Imagine all the other things you could focus on instead!
- Less Room for Human Error: Let’s face it: we’re human, and mistakes happen. You could enter a number wrong, miss an outstanding check, or forget to log a bank fee—and suddenly, nothing reconciles. With automation, the software handles these repetitive tasks with precision, drastically reducing errors like duplicate entries or misrecorded fees. It’s like having a second set of eyes that doesn’t miss a thing.
- You Get Real-Time Financial Updates: Waiting until the end of the month to find out where your cash stands is stressful, right? Automation allows you to reconcile accounts as often as you need—daily, weekly, you name it. This means your cash balance is always up-to-date, giving you real-time insights into your business’s financial health. No more guessing where the numbers are. You’ll know exactly what’s happening with your bank accounts at all times.
- Better Control Over Cash Flow: Keeping track of your cash flow is critical, and automation makes it much easier. With real-time access to your bank balances and instant alerts for any discrepancies, you’ll always know if your accounts can cover upcoming expenses. Plus, with recurring payments like payroll or vendor invoices, automated reconciliation helps you avoid surprises like overdrafts or late fees.
- Audit-Ready Financial Reports at the Click of a Button: Let’s not forget the joy of audits. Auditors love clean books, and automation helps you get there faster. With just a few clicks, you can generate reconciliation reports that show a clear, transparent trail of all your transactions. This makes compliance easy and ensures that you’re always ready when it’s time to present your financials to stakeholders or auditors.
- Your Team Can Focus on What Really Matters: Automating reconciliations isn’t just about saving time—it’s about freeing up your accounting team to work on higher-level tasks. Instead of spending hours working through transactions, your team can focus on financial analysis, strategic planning, or any of the more important aspects of their role. Automation takes the routine work out of the process and gives your team more bandwidth for tasks that drive value.
If you’re nodding along with the benefits of automation, you’re probably wondering which tool could help. Sage Intacct is an excellent choice for automating the bank reconciliation process. Designed specifically for accounting professionals, Sage Intacct is one of the best financial reporting software that offers automated reconciliation features that integrate seamlessly with your existing accounting system. It handles everything from real-time transaction matching to generating detailed reconciliation reports.
With Sage Intacct, you get the accuracy and ease you need to keep your financials in check—without the stress of manual reconciliation. It’s a tool that understands the specific needs of the accounting process and makes your job simpler.
Conclusion on How to Reconcile a Bank Statement
Bank reconciliations may not be the most glamorous part of accounting, but they’re critical for maintaining accurate financial records and keeping your operations on track. When done regularly and correctly, they can help you spot discrepancies, prevent errors, and provide a clear view of your cash flow. Whether you’re managing the finances for a small business or a nonprofit, the time and effort you put into bank reconciliation directly affect the financial health of your organization.
Automating the process can save you time, reduce the risk of errors, and give you access to real-time financial data. Tools like Sage Intacct streamline the entire process, helping you keep your financial records accurate and ready for audits.
At the end of the day, a solid reconciliation routine is your best ally when it comes to keeping everything in order and avoiding surprises down the line.
Key Takeaways
- Bank reconciliation is essential for ensuring that your company’s accounting records match your bank statements, preventing errors and maintaining a clear view of your cash flow.
- Regular reconciliations catch discrepancies like bank errors, missing transactions, and fraudulent transactions before they become major problems.
- Automated tools, such as Sage Intacct, can drastically reduce the time spent on manual reconciliations while improving accuracy and offering real-time financial insights.
- The frequency of reconciliations should match your business’s transaction volume—smaller businesses may need monthly reconciliations, while larger organizations could benefit from weekly or daily checks.
- Proper bank reconciliations lead to accurate financial reporting, smoother audits, and better financial management overall.
Frequently Asked Questions
What are the four steps in the bank reconciliation?
The four steps in bank reconciliation can include comparing your bank statement to your company’s accounting records. Next you adjust for outstanding checks and deposits in transit. Then you account for bank fees, interest income, and any other discrepancies. Finally, make sure your adjusted bank balance matches your cash balance in the accounting system.
What is a bank reconciliation statement?
A bank reconciliation statement is a document that outlines the differences between your bank statement balance and the balance in your company’s accounting records. It explains the adjustments made, such as outstanding checks, deposits in transit, and bank fees, to reconcile both balances.
What is the formula for bank reconciliation?
The formula for bank reconciliation can be summarized as:
Adjusted bank balance = Bank statement balance – Outstanding checks + Deposits in transit – Bank fees + Interest income.
This formula helps you confirm that your adjusted bank balance matches the cash balance in your accounting records.