Published on: September 22, 2020

Bank Reconciliations: A Step-By-Step Guide

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    A bank reconciliation process is a critical method to help you double-check your bookkeeping. By comparing your bank statements and your business accounts the process can help keep your company’s financial records on track.

    What Is a Bank Reconciliation?

    A bank reconciliation is a process that ensures a company’s general ledger accounts, balance sheets, and check register are accurate. Regularly checking your books against reliable bank statements can help you with the following issues:

    • Fix Mistakes

    Quickly find bookkeeping mistakes and correct them before they become giant issues for your company. 

    • Detect Bank Errors 

    Sometimes it isn’t your fault when your ending balances are off. If you cannot figure out why you have a discrepancy in your accounts, you may need to check with your bank. 

    • Catch Fraud

    Regularly checking your accounts is a more efficient way to spot suspicious activity or incorrect payments.

    • Track Profitability

    Verifying all your expenses and earnings can help you see how much money your business is actually making. 

    • Tax Breaks 

    As you are doing your bank reconciliation, you can classify tax-deductible expenses more easily. 

    • See How Your Business Is Running

    When you regularly verify your numbers, you can quickly see the company’s overall financial performance.

    7 Steps That Go Into a Bank Reconciliation

    The bank reconciliation process can be quite tedious, as you need to be extremely detailed when you switch between documents and compare numbers. The end results are crucial to your company’s financials, however, and the process needs to be done on a regular basis to ensure accuracy.

    To make the process easier, consider the following bank reconciliation steps:

    1. Get Bank Records and Business Records

    Before you start, you need to gather the following information:

    performing a bank reconciliation
    • A list of transactions from the bank. You will need to get that from your online banking account, a statement, or have the bank send the data to your accounting software. 
    • Credit card and current account statements if you run a credit card and current account. 
    • Your ledger of income and outgoing expenses.

    2. Find Your Starting Point

    Your starting point will be the last time the balance on your business books was the same as your bank account balance. You will then begin the reconciliation from the accounting records. 

    3. Go Through the Bank Deposits

    Examine each deposit and make sure it appears as income in your accounts. If there is any data that is missing, enter it. Figure out if that entry was a refund, interest, sale, or something else. 

    4. Verify the Bank Account Income 

    Check the income on your books by verifying that each entry matches a deposit on your bank statement. If you find anything missing, figure out why. Perhaps there is a payment that has yet to clear. 

    5. Verify Bank Withdrawals

    Every bank withdrawal needs to be recorded. This needs to include bank fees, which may have not previously have been accounted for. 

    6. Check the Expenses

    Every entry needs to match a withdrawal on your bank statement. If it does not, you need to discover why. For example, you may have paid with cash or used a different account. 

    7. Check Your Bank Account Ending Balance

    The bank balance needs to match the totals in your business account once you are done checking all the withdrawals and deposits. If the end balances are not the same, you will need to repeat the process until the error is found.

    Common Bank Reconciliation Questions

    Regardless of whether you operate a small business or a large entity, you may have plenty of questions if you are new to the bank reconciliation process. Consider the following three common concerns that many individuals have when starting the bank reconciliation process:

    1. Do all the numbers have to match up perfectly? 

    No, but only because not every transaction will go through your bank account. This is not necessarily an issue as long as you understand why, but you need to make sure you have a clear record of each of these transactions.

    1. How often do I need to do the bank reconciliation process?

    For the most part, this will depend on the volume of your transactions. However, it is best that you do this procedure frequently — which means daily, weekly, or at the end of the month, depending on your business. The longer you delay, the more time-consuming and complicated reconciliation becomes.

    1. Why does it seem I am always a few dollars off? 

    Remember that bank service fees will bring your bank balance down. That is why you need to make sure you enter those deductions into your expenses account. 

    Bank Reconciliation Problems

    Making sure your bank reconciliation statement is accurate requires detailed accounting records and financial statements. That’s a lot of numbers to track, and it does not take much to make an error. 

    Knowing what you need to watch for can help you recognize and avoid problems before they pop up, however. Here are some of the common mistakes made during bank reconciliation processes:

    • Bulk Amounts

    In some cases, transactions are aggregated and presented in the bank statement as bulk amounts instead of individual records. You need to make sure you are performing an advanced analysis in order to match these transactions. 

    • Math Errors

    One of the most common reasons for bank reconciliation problems is a math error. Whether you recorded an amount inaccurately or transposed two numbers, the issue can cause your results to be off. Always make sure to run numbers twice and check over each number you write down.

    • Outstanding Checks 

    Another common problem occurs when checks do not clear the bank until after your statement closing date. It is thus best to record how transactions are paid in your general ledger. This way if a ledger designates a transaction as paid with a check, you can look into the bank statement section and verify if the check cleared.

    bounced check from bank reconciliation

    Sometimes bank reconciliation problems may be bigger than you can handle alone, especially when they involve fraud. In these situations, reach out to the experts. Work with a trusted tax advisor that can help you figure out the issue as well as how to fix it. 

    Do Not Let Bank Reconciliations Become a Huge Ordeal

    Bank reconciliations can turn into mind-numbing processes of matching up immense amounts of data, but the above tips can ensure the process is being done correctly — and that you are avoiding tedious mistakes. 

    If you are struggling with any issues that are too difficult to handle alone, be sure to contact Silver Tax Group! Our team can discuss your bank reconciliation questions or assist you with any other tax-related questions you might have.

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