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A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe.

Many companies produce bank reconciliation statements regularly to ensure they’ve recorded all their banking transactions properly and that their ending balance matches the amount the bank says it has.

Key takeaways

  • Bank reconciliation statements are important tools for ensuring the accuracy of a company's financial records and detecting errors or fraud.
  • The bank reconciliation process involves reviewing deposits and withdrawals, adjusting the cash balance, and accounting for interest and fees.
  • Regularly creating bank reconciliation statements can help a business correct any discrepancies and better manage its cash flow and accounts payable and receivable.
  • The frequency of bank reconciliation can vary based on a business' needs, but it is important to establish a routine schedule to ensure accuracy.

What is the purpose of a bank reconciliation statement?

Bank reconciliation statements can help identify accounting errors, discrepancies and fraud. For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement doesn’t show such a deposit, there may have been a mistake or fraud.

Making sure a company’s and its bank’s listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process also enables the company to record any interest payments the account has earned or fees the bank has charged.

The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable.

How often should you reconcile your bank account?

The frequency of bank reconciliation can vary based on your business’ specific needs. Some businesses balance their bank accounts monthly, after receiving their monthly bank statements. However, businesses with a high transaction volume or increased fraud risk may need to reconcile more frequently, sometimes even daily. The key is to establish a routine that best suits your business’s unique needs and financial activity.

If you’re using accounting software, it may give you the option to connect your bank account so transactions are automatically downloaded and categorized. This can save you some time, although it’s important to periodically check everything manually to ensure its accuracy and that there are no bank errors.

How to do a bank reconciliation

Before sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements. You can get a template online to use for your bank reconciliation statement, or you can use a spreadsheet.

Step 1: Find the starting balance

If you’re doing a reconciliation every month, your starting balance will be the final balance from the previous month.

Step 2: Review the deposits and withdrawals

Check your ledger’s recorded deposits, withdrawals and cleared checks against those listed on the bank statement. Ensure all of the amounts match and investigate any discrepancies. Everything listed on the bank statement should be included in your records and vice versa.

Step 3: Adjust the cash balance

In your ledger balance, be sure to account for deposits that have yet to clear, as well as checks you’ve written that have yet to be cleared by the bank. The end result is the adjusted cash balance, which ensures your ledger balance matches the bank statement balance.

Step 4: Account for interest and fees

Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement. Also, deduct any penalties or fees the bank assessed that your ledger doesn’t list.

Step 5: Compare end balances

After reviewing all deposits and withdrawals, adjusting the cash balance and accounting for interest and fees, your ledger’s ending balance should match the bank statement balance. If the two balances differ, you’ll need to look through everything to find any discrepancies. These could turn out to be mistakes on your part or that of the bank.

Bank reconciliation example

Regularly creating a bank reconciliation statement allows you to find errors by comparing your company ledger with your bank statement. Then, you can correct your records as needed.

For instance, your ledger may have a current balance listed of $350,000. However, the bank statement lists an amount of $348,975. When comparing your records with those of the bank, you find that:

  • A check written for $2,000 was inadvertently recorded in the ledger as $1,000.
  • The bank charged a service fee of $50 that needs to be recorded in your ledger.
  • The account earned $1,000 in interest that needs to be recorded in your ledger.

The table below illustrates how these three items could be added in to your ledger:

Items found in bank records Adjustment to ledger Ledger balance
$1,000 error on check ($1,000) $349,000
$50 service charge ($50) $348,950
$25 earned in interest $25 $348,975

Bottom line

A bank reconciliation statement is important in managing your busines finances. This document can help ensure that your bank account has a sufficient balance to cover company expenses. It’s a tool for understanding your company’s cash flow and managing accounts payable and receivable. If you haven’t been using bank reconciliation statements, now is the best time to start.