What is Bank Reconciliation?: Its Importance, Template, and Example

Holding and utilizing cash frequently is a common practice for businesses, and thus, its proper reporting is non-negotiable. Every minute detail, like the amount and timing, should be accurate to avoid confusion in finances, and that’s where bank reconciliation helps. For businesses looking for comprehensive financial record support, services like year-end accounts & CT returns services can ensure accuracy across reporting periods.

So, what does “reconcile” mean in accounting? It simply means checking the internal records and matching them with bank statements to ensure that every penny is accounted for. We have explained everything from what is a bank reconciliation to how to reconcile in QuickBooks Online in this blog. So read till the end!

What is Bank Reconciliation? 

Bank reconciliation shows the comparison of the balance in the books of accounts as it is recorded in the company accounts against the balance indicated in the bank statements. This is meant to determine the differences between the two records and adjust them accordingly to ensure that both balances contain the same and accurate amount. For ongoing record accuracy, many businesses rely on comprehensive bookkeeping services which help maintain organized transaction data.

The discrepancies tend to occur since the bank and the business record some of the transactions at different times. The best example is a check issued by the company that may not be cleared by the bank on the spot, or an accounting services charge by the bank may be imposed. Bank reconciliation is there to make sure that these timing differences and errors are detected and fixed. 

When the cash balance reconciliation process is done, the adjusted balance is the real and true cash position of the business. But bank accounts are not the only ones that can be reconciled in accounting. It may also be reconciling:

• General ledger accounts with sub-ledgers 
• Balances of customers and accounts receivable 
• Accounts payable and balances with the vendor 

And as we know, the most common and important type of accounting reconciliation is bank reconciliation, as it is related to cash. Many firms integrate this with their broader accounts receivable outsourcing and accounts payable services for end-to-end cash flow control.

What is Bank Reconciliation Statement?

A bank reconciliation statement is a formal statement that illustrates how the balance, as per the bank statement, is adjusted to reflect the balance as per the accounting records of the company. 

The statement serves as the transition between the two balances and provides transparency to: 

• Unprocessed transactions in the bank 
• The bank will have transactions that are not reflected in the books. 
• The errors can be found easily that are made by either party. 

When all the adjustments have been made, the end balances on the two sides of the statement must be equal. For a complete financial picture combining reconciliation with management accounts services can deliver deeper insight.

Importance of Reconciliation in Accounting Statements 

The preparation of a bank reconciliation statement is necessary due to a number of reasons written below: 

• Elimination and Detection of Errors: Comparing all transactions in the books to the bank statement will help businesses to identify duplicate transactions, errors in their data entry, or some transactions that could have been overlooked and likely distort the financial statements. 

• Fraud Detection: Periodic reconciliation would aid in the detection of unauthorized withdrawals or tampered checks and suspicious electronic transactions. Early identification will enable businesses to report fraud within the stipulated time of the bank. 

• Better Cash Control: Bank reconciliation allows businesses to prevent overdrafts, bounced checks, and liquidity problems, as every cash movement is valid and accounted for. 

• Expense and Fee Tracking: The activity of reconciliation brings out the recurring bank fees, service charges, and interest charges, which allow businesses to control the costs in a better manner. 

What Should Be the Frequency of Accounting Reconciliation

Bank reconciliation frequency is based on the level of transactions and the complexity of the business. 

Less frequent transactions may not require much, and occasional monthly reconciliation by the small business or an individual after receiving the bank statement is adequate. However, companies that have high levels of transactions should use weekly or daily reconciliation, which enhances better monitoring of cash flows and minimizes the chances of making errors. 

Modern online banking has the benefit that you do not have to wait until the end of the month to do the reconciliation, but it can be performed at any point in time. 

How to Write a Bank Reconciliation Statement?

A typical bank reconciliation statement consists of two primary parts: Balance per bank and balance per books. 

Balance Per Bank

This part begins with the final amount of the bank statement, followed by making adjustments to transactions that have already been made in the books of the company but not in the bank’s books. 

These typically include: 

• Exceptional checks that were issued and not cleared 
• Transactions of deposits in transit that have been registered by the business but not completed by the bank 
• Any errors made by the bank 

Balance Per Books 

This section starts with the cash balance that is reflected in the general ledger of the company. It does adjust the transactions that are reflected in the bank statement and are yet to be entered in the books.

These changes consist of: 

• Bank service fees 
• Interest obtained on the account 
• Bank debit or credit memos 
• NSF (bounced) checks 

Having taken on all the adjustments, the two sides must give a correspondence to the same final balance. 

Bank Reconciliation Example

Understanding bank reconciliation can be a lot simpler with examples to support how discrepancies between the bank statement and the accounting records of the company occur and how to resolve them. 

Suppose a business has a balance of cash at the end of the month, according to the bank statement, it is $145,000. This, however, does not reflect in the cash balance of the company in its accounting records. In the reconciliation process, the accountant can establish a number of differences related to timing. 

The first thing that is done is to give a $15,000 discount to a supplier who has been registered in the books of the company but has yet to be cleared by the bank. Second, the company was receiving a customer deposit of $10,000, which has already been received by the company and has not been recognized as a deposit by the bank, and thus it is a deposit in transit. Also in the bank statement, there was a service charge of $50 and an amount of interest income of $100, which has not been reflected in the company’s books. 

To reconcile the balances: 

• The pending amount of $15,000 is subtracted from the bank account. 
• The $10,000 deposit in transit is included in the bank balance. 
• The bank service fee is charged at $50 and is subtracted from the book balance. 
• The interest income of $100 is added to the book balance.

Once all the adjustments have been made, the adjusted bank balance and the adjusted book balance will be equal. This figure at the end represents the actual and relative cash balance of the company. The example reveals clearly that bank reconciliation assists in the elimination of timing differences, and correct financial records are possible. 

Why Do Differences Occur in Bank Reconciliation Statement? 

It is not uncommon that there are differences between the bank reconciliation bank statement and the accounting records of the company. Such differences are usually brought about by the fact that the bank and the business do not record the transactions simultaneously. 

For example, the business checks may take days before clearing the bank, leaving unclear checks. The deposits were carried out late in the business day, thus causing deposits in transit. Another example is that automatic transactions like ACH payments, wire transfers, crediting interest, or bank fees might be made by the bank upon completion, of which the company will not update its accounting records. 

Bank reconciliation is done to identify such differences, categorize them properly, and adjust them in such a way that the records show the same balance of cash accurately. 

Bank Reconciliation Template

A bank reconciliation template offers a framework for a regular and systematic way of writing reconciliations. The standardized template will minimize errors and make sure that all necessary changes are taken into account. 

Here’s a detailed template of a bank reconciliation statement, which includes: 

• The balance according to the bank statement 
• The balance of cash according to the books of the company 
• A separate section of corrections to the balance of the bank, including outstanding checks and deposits in transit. 
• Another section of the book balances modifications, including bank fees, interest earnings, debit memos, and credit memos. 
• Space to add notes and explanations of inconsistencies 
• The final balance of reconciliation 

Audit readiness can also be enhanced by using a bank reconciliation template since it gives a clear record of adjustments made to balances and their reconciliation. 

4 Best Practices to Follow for Bank Reconciliation 

Bank reconciliation is a vital accounting activity because it ensures that the business’s cash records are accurate and match the bank statement. Here are the best practices that help to facilitate smooth bank reconciliation:

• Balance Bank Accounts Regularly: The bank reconciliation is to be done at least once a month, or more often in the case of a business with a good turnover. Periodic reconciliation will reveal the discrepancies in time and will not allow minor errors to become bigger financial problems. 

• Make Bank Statement Point of Reference: During reconciliation, the balance and transaction information of the official bank statement are supposed to be used and not estimated balances. This makes sure that no comparison is done based on the information that has not been verified. 

• Check on Bank Charges, Interest, and Autopayment: The bank statement will include service charges, interest income, and automated debits or credits, which can be registered before being entered in the books. These items should be reviewed to make sure that no transaction is overlooked. 

• Check Manually for Accuracy: Reconciliation can be helped out with software such as Quickbooks and transactions must be verified line by line. Manual checking assists in the detection of inappropriate or duplicate records, which a computer program might overlook. 

Wrapping Up! 

Bank reconciliation is a very important accounting operation that maintains the balance of the cash of a business within the correct financial standing. Through a consistent comparison of the accounting records with bank statements, businesses are able to identify errors, avoid cases of fraud, and ensure that cash flow is controlled. 

Regardless of the method of performing a bank reconciliation, be it manually or through programs such as QuickBooks, a regular bank reconciliation that has been well documented enhances financial reporting and facilitates long-term solvency to any organization.