Reconciling Your Bank Statements: How and Why?

20 May 2024 - Category: Blog /
banks statements

Picture this, you reach out for your cash books only to be rudely interrupted by the realisation that the cash books don’t match the bank statements.

Your mind starts racing in every direction possible. Something is wrong with my business if the cash books don't match the bank statements, right? Maybe someone is stealing from me or the bank is making errors?

Cash books not aligning with the statements can create serious cash imbalances over time.

As a consequence, the integrity of your company's financial data could come into question. Even worse, the legitimacy of your business could be at stake.

The good news - you can avoid all this by being careful since day 1.

It is important for the health and sustainability of your business that you reconcile bank statements regularly. The process of matching business transactions of all natures and sizes with the bank statements may be long and detailed, but the reward is far greater than the effort it requires.

During the process of reconciling the statements, you may or may not identify various discrepancies that you must report, investigate and resolve but better to start today than regret later. Some of the most common discrepancies in the statements are a result of time differences, human or tracking error, fraud or unauthorised transactions.

The key to a successful and accurate bank statement reconciliation is to take a methodical approach throughout the process.

The following discussion can help you save time and unwelcoming surprises in the future.

What Is Bank Reconciliation?

Bank reconciliation refers to the process of ensuring a company's cash records match the bank statements.

In other words, the cash balance in your company's books must perfectly align with what the bank statements. The aim of running these checks on your books is to identify any discrepancies between the two and make accounting adjustments accordingly.

Here is a detailed step-by-step guide on the bank statement reconciliation process:

Step 1: Get All Relevant Documents

One of the most important steps to reconciling a bank statement is gathering all the relevant documents.

Start with the bank statements of the reconciliation period.

That means that if your company reconciles bank statements monthly, it needs to get all the statements of that month in one place. In addition to that, you need a record of all the cash inflows and outflows during the reconciliation period.

Companies that deal mostly in cheques need their cheque register along with details like cheque numbers, dates, amounts, and payees.

Lastly, you will need all the deposit slips, electronic payment records, credit card statements, and invoices received during the reconciliation period.

Step 2: Compare Deposits and Withdrawals

Deposits refer to the money your business receives during the reconciliation period. You must ensure the deposits on your company's cash book match the bank statement.

Review receivable payments, sales, loan proceeds, and other cash inflows in your books thoroughly to avoid any confusion or revisions later on.

Check each of these entries against their corresponding bank statement. Ensure that the dates and amounts are consistent between the two documents i.e your books and the bank statements.

Similarly, you need to match the withdrawals in your cash book with the bank statement. In this case, you have to review the salaries, supplier payments, utility bills, and other expenses.

During this step, you might find some discrepancies like time differences and unrecorded deposits/withdrawals. Some of the reasons why this may happen include outstanding items or bank errors. Highlight and document these discrepancies for further investigation.

You can also use financial software tools like Autorek or Quickbooks to automate the tedious task of matching transactions to save time and ensure greater accuracy.

Step 3: Reconcile Outstanding Items

Outstanding items are one of the main reasons your business cash book and bank statements don't match. These items mainly include outstanding cheques and deposits in transit.

You might’ve issued a check that the bank hasn’t cleared. That’s an outstanding cheque. So, although it’s recorded in the cash books, your bank statement doesn’t show it yet. Therefore, outstanding cheque or check reconciliation is essential to solve the discrepancies.

The same goes for deposits in transit. Your company has made the deposit but the bank has yet to process it. These issues usually occur when you’ve sent the cheque or deposit to the bank closer to the end of the statement period.

If you notice the bank is withholding the processing of your cheques and/or deposits, please connect with the bank to know what’s holding your financial activity back.

Step 4: Adjust Bank Statement and Cash book

If you identify outstanding items like the ones mentioned above, you will need to make efforts to adjust the bank statement yourself by adding or subtracting the outstanding amount to the numbers on your bank statements. That way the statement would show the true amount of cash available for your company.

Calculate the total amount of deposits in transit and add them to the amount on the bank statement. Then, subtract the total amount of outstanding cheques from the amount.

Bank error reconciliation is also essential in this step since they can sometimes make mistakes too. It’s best to use a reconciliation worksheet for organised and detailed documentation of the adjustments.

Once done, you must adjust the business cash book so it looks identical to the bank statement. The first item to consider is the bank interest. Your account must've earned interest which the bank recorded but the cash book hasn't.

Bank fee reconciliation is also important here. Deduct the bank service fees they charged for account maintenance and transactions.

Step 5: Prepare The Final Bank Reconciliation Statement

After adjusting both sides, you can finally prepare the Bank Reconciliation Statement. It’s recommended to use a standard bank statement reconciliation template here.

This document shall contain the complete summary of the reconciliation process.

Start with the initial balances on both sides, list all the adjustments, and mention the final balance at the end.

The document must mention all the discrepancies you noted during the process. Provide a detailed explanation about the nature of the discrepancies and how you resolved them.

Importance of Reconciling Bank Statements

Since it seems like a lot of work, you might wonder why reconcile bank statements in the first place. Well, the most important reason is to detect various discrepancies and frauds.

Apart from that, it also gives you a clearer understanding of your business cash flow and helps you operate your business better.

Prevent Cumulative Errors

Think of your business like it’s a human body. If you don't address minor health issues in time, they can accumulate over time and make way for serious chronic diseases. Your business accounts are the same way.

Even with quality bookkeeping, small discrepancies can keep occurring. For instance, double charges, incorrect withdrawals, missed deposits, etc. When you regularly reconcile bank statements, you prevent small issues from snowballing into bigger problems. Plus, you maintain the integrity of your company’s financial data. Win-win!

Detect Frauds and lost items

Malware can gain access to your system by various means. Some of these advanced malware will stay hidden and keep making small unauthorised transactions. If you keep delaying bank reconciliation - the damage may be beyond repair by the time you figure out what’s happening to your business.

Regular bank statement reconciliation will lead to investigations of the smallest discrepancies and consequently catch such fraudulent attempts at the earliest. You will also be able to detect if any dishonest employee is stealing from the company. In addition to that, you will also identify lost or stolen cheques (if any).

Manage Your Business Better

Owners who routinely reconcile bank statements of their company know exactly how much liquid cash is available for their business. This helps them manage expenditure efficiently and avoid any last minute cash shortages. Moreover, this process also helps the owners create clean audit trails for every business transaction the company ever made.

This will establish the legitimacy and integrity of your business operations to authorities and potential investors.

Free Bank Reconciliation Personal Finance App

As you can see, the bank statement reconciliation process becomes much easier and streamlined when you have all your transaction records organised in one place. Small World Financial Services' app and website can help you with that.

Whenever you use our app for an international transaction (paying overseas workers or suppliers), a detailed digital record of every transfer made by you is created.

Our platform also provides tracking features for the transactions. This can come in handy when you are matching your cash book and bank statement.

Small World works to make this complicated world smaller and easier for you. And that can extend to the tedious process of bank statement reconciliation too. Contact us to know more.

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