Essential Steps to Simplify Your Bank Reconciliation Process
Despite the growing use of accounting software by small business owners, businesses must regularly compare bank statements to personal records. This technique, known as bank reconciliation, guarantees the accuracy of the firm’s records and aids the organisation in spotting any irregularities, mistakes, or fraudulent transactions. In this post, we’ll explain bank reconciliation, walk through how to accomplish it, discuss some frequent issues that emerge during record reconciliation, and demonstrate an example of bank reconciliation.
What is Bank Reconciliation?
Bank reconciliation is the activity of comparing a company’s records to its bank statements to ensure that all transactions are accounted for. The technique is a helpful tool for keeping correct records, preventing fraudulent charges, and addressing any other disagreements or complaints. Most firms do bank reconciliation, or bank rec, at the end of each month, although the frequency is primarily dictated by the size and volume of transactions of the organisation. Some bigger firms, for example, need daily reconciliation of their data.
Regardless of the frequency, bank reconciliation should be performed on a regular basis. Accounting software is available to make the bank reconciliation process easier and more efficient, despite the fact that some organisations still keep their records by hand. The bulk of these systems consolidates the company’s bank accounts, giving access to all data and records in a single spot.
How to Carry Out a Bank Reconciliation?
Stages for completing bank reconciliation are as follows:
- Obtain bank records.
- Gather your company’s records.
- Find a starting point.
- Examine your banking deposits and withdrawals.
- Examine your books for revenue and spending.
- Change the bank statements.
- Make changes to the cash balance.
- Contrast the final balances.
1. Collect bank records
To reconcile your data, you’ll need access to a list of your transactions. This data is accessible through online banking, bank statements, or allowing your bank to share data with your accounting software.
2. Gather all of your company records
You’ll also need access to your organization’s ledger, or books. This information is often saved in a spreadsheet, a logbook, or an accounting programme.
3. Choose where to begin
You’ll know where to begin if you’ve recently balanced your books. If you’re not sure, try to recall the last time your books and bank account balances matched, and then go from there.
4. Review all of your bank transactions and withdrawals.
Ensure that all of your deposits and withdrawals are appropriately shown on your bank statement. If something is missing, you must fill in the blanks.
5. Examine the income and expenses in your books
Check your books against your bank statements to confirm that every transaction is documented correctly. Determine why there is an unmatched item. Perhaps a payment hasn’t yet been processed, or you forgot you paid cash for anything.
6. Adjust the bank statements
A bank statement may not always accurately reflect a company’s activity. Outstanding checks, bank problems, and deposits in transit are all major reasons. For any reason, make the appropriate changes to the bank statement.
7. Correct the cash balance
You’ll also need to amend your records to accurately represent all of the company’s transactions. This will be performed by ensuring that all charges and deposits are correctly documented in the cash account of the firm.
8. Contrast the final balances
Once you’ve matched the records and made any required changes, double-check that the final balances are the same, and the reconciliation process should be complete. If they are still uneven, you will have to repeat the process to find the problem.
Bank reconciliation is performed for a number of reasons:-
Regular bank reconciliation offers several benefits. Here are a couple of such examples:
- Fraud detection and suspicious transactions.
- Keeping track of bank transactions, penalties, and fees in the company’s accounting system.
- Keeping detailed records of the company’s receivables and payables.
- The capacity to detect problems such as duplicate or missing payments
Common issues found during bank reconciliation
One of the most significant reasons to perform bank reconciliation is to discover potential issues. Here are some of the most typical problems you’ll run into during bank reconciliation:
Checks that are returned after they have been deposited: In a variety of circumstances, the bank may reject to deposit a cheque. This is usually because the check was written in a foreign bank account. If this happens, you must credit the cash account, reduce the balance, and raise the debt in the accounts receivable account to reverse the item that reflects the failed deposit.
Checks that have been void and cleared by the bank: If a check has been void and cleared by the bank for an extended period of time, it should be void and replaced. In rare situations, the payee may attempt to cash the original cheque. If the cheque has been voided by the bank, they should refuse to cash it. If the bank was not notified of the cancelled check, you will need to credit both the cash and checking accounts to explain the payment.
If you do not notify the bank about a cancelled check, you risk getting two payments.
Double payment: If you do not notify the bank about a cancelled check, you risk getting two payments. If the payee cashes a new check, you must seek restitution from the payee.
