How to Prepare Bank Reconciliations

Many business relationships have been affected negatively by companies not having accurate records. Misconstrued records lead to inaccurate budgets, poor purchasing decisions, unsound gross margins, inaccurate financial statements, and quite possibly checks being issued for which there is no cash in the bank. These types of adverse incidents can be averted with regular bank reconciliations.

Preparing a bank reconciliation, or a bank rec, at the end of each month is one of the best ways you can check the accuracy of your accounting records. A bank reconciliation statement will confirm that all the transactions in your cash account match those of your bank statement and vice versa. Bank reconciliations not only catch errors and adjustments but they can also discourage fraud.

In this article, you will learn how to prepare a bank reconciliation and I will define all of the related terminology. I'll also give you a simple example that you can use as a bank reconciliation template and answer some of the more common questions people will have about procedures and policy.

Definition of Terms

  • Cash can include bills and coins, outstanding deposits. Items like postdated checks, certificates of deposit, and IOUs are not usually classified as cash.
  • A bank reconciliation compares the amount of cash shown on the monthly bank statement with the amount of Cash reported in the general ledger.
  • Outstanding deposits are deposits entered on company records but not processed by the bank.
  • Outstanding checks are checks written which have not cleared the bank.
  • Cash account ("Cash") in this article refers to the cash account in the General Ledger ("G/L") that keeps track of all the deposits that increase the Cash account or payments that decrease the Cash account.
  • Bank refers to the monthly bank statement(s) provided by the bank.

Why You Should Prepare Bank Reconciliations

Bank Reconciliations Keep Accounting Records Accurate

Bank reconciliations confirm that you have recorded all transactions in your accounting records, that all deposits have made it to the bank, and that all the checks you have written have been cashed. By performing bank reconciliations regularly you can also be more confident that you will not issue Not-Sufficient-Funds ("NSF") checks to suppliers, vendors, creditors or employees. This will keep your relationships in good order and keep you out of trouble with the authorities knowing that your payroll withholdings check cleared the bank.

As an example of an organization that fails to prepare bank reconciliations, suppose a company had over $150,000 of revenues that were not recorded in the statements and over $200,000 of expenses that likewise were not recorded. This entity will have had a net loss of $50,000 that was not recorded in the accounting records and their decision-making ability will have been severely compromised as a result.

If your general ledger Cash account is not up-to-date, it is easy to make errors in tracking what the actual cash situation is because of time lapses between when a check is written and when it is cashed and when a deposit is received and when it is placed in the bank. These types of transactions are called outstanding deposits and outstanding checks and are hard to keep mental track of particularly when there is a large number of them.

Bank Reconciliations Can Deter Fraud

Business owners place incredible trust in the people they hire to handle finances. It is good practice for someone who does not prepare the cash deposits or handle disbursements to prepare the bank reconciliation each month. Having an independent person prepare the reconciliation serves as an internal control, creates separation of duties, and deters fraud unless there is collusion. Another financial policy recommendation is for the business owner to review the bank statement and the cancelled checks from time to time before they are opened by anyone else in the organization to look for any thing out of the ordinary.

Tips and Techniques for Smooth Bank Reconciliations

Most Common Adjustments to the Accounting Records

In this article the Cash account refers to the accounting records and the Bank refers to the bank statements provided by the bank. The most common adjustments to the Cash account will be for bank charges, interest income, automatic payments/deposits and NSF checks that are recorded in the Bank account but not in the accounting records. All these differences need to be recorded and any NSF checks followed up with the client/customer for payment.

When does the Bank not agree with the Cash?

The Bank balance and the Cash balance rarely agree with each other and so the two balances need to be reconciled to one another manually or through your accounting software program. The most common items that cause the Cash balance not to agree with the Bank balance are outstanding deposits and checks.

It is rare for the bank to make errors since everything is electronic but now and then I have seen small discrepancies of a few pennies and on occasion the bank has even lost a deposit or two. Once you have identified the missing deposit or discrepancy you will need to work out a solution with your bank or confirm that your Cash account is correct. The most common errors made by banks are on their bank charges so keep an eye on these and ensure they match your banking agreement.

When would a Deposit be recorded in accounting records but not in the Bank?

One of the most common type of deposits not recorded on the bank statement are credit card transactions that have to be manually batched and sent to the bank. This is an easy fix when completing your bank reconciliation statement form unless you have lost the credit card deposit records.

Deposit or Check on the Bank Statement but not in the Accounting Records

Usually a deposit or check that is not in the Cash account is one that was recorded but subsequently deleted by mistake or a deposit that just was not recorded in the general ledger.

Bank Reconciliation Example - How to prepare a Reconciliation Manually

A bank reconciliation prepared in an accounting software package follows the same principles as those laid out below but will not be covered in this article. Bank reconciliation software is generally packaged with most lower-priced accounting software packages and may be available as a separate module for higher-priced software.

A bank reconciliation form consists of two accounting equations that must be performed in order to prepare a proper reconciliation. The 1st equation in the sample below shows a Bank balance that is adjusted so that it agrees with the Cash balance. The 2nd equation shows a Cash balance that is adjusted in order to agree with the corrected Bank balance. Use the following bank reconciliation sample as a guide for your own reconciliation statements.

Equation 1

Item Amount Step
Ending balance per Bank 12.31.13 $XX.XX  
+ Outstanding deposits XX.XX Step 3
- Outstanding cheques -XX.XX Step 3
Correct balance $XX.XX Step 4

Equation 2

Item Amount Step
Ending balance per Cash 12.31.13 $XX.XX  
+ interest income per Bank XX.XX Step 2
+ other unrecorded deposits XX.XX Step 2
- bank charges per Bank -XX.XX Step 1
- other unrecorded payments -XX.XX Step 1
- NSF cheques -XX.XX Step 1
Correct balance $XX.XX Step 4

The best way to prepare the reconciliation manually is to compare all the transactions on your bank statement to a print-out of your Cash general ledger. The following points will help guide you through the reconciliation:

  • Step 1 - Reconcile the checks that come out of the Bank against the checks in your general ledger. Use the check number on the bank statement to help you find the check in your Cash account then cross the amount off on both documents. If you do not find the check in the Cash account circle the $ amount on the bank statement so that you know at the end of the exercise that it is a reconciling item. Remember to check that the dollar amounts are the same rather than just looking for the check number. Insert the amounts into the place marked Step 1 in the formula above.
  • Step 2 - Reconcile the deposits that go into the Bank against the deposits on your general ledger. Once again, when you find an amount on your Cash account that matches your deposit on the Bank account cross both amounts off. If you do not find a deposit that is on your Bank but not in Cash then circle it. Insert the amounts into Step 2 of the formula above.
  • Step 3 - Circle any checks on your Cash general ledger that have not been crossed off. All the uncircled deposits are outstanding deposits and all the uncircled checks are outstanding checks that should be inserted into Step 3 above.
  • Step 4 - The two recalculated amounts must agree. If they do not, then every transaction must be compared between the Bank and the Cash account again to find were the discrepancy is.

Conclusion

Bank reconciliations should be performed monthly and are essential to keeping your accounting records accurate. Organizations that do not prepare regular reconciliations are susceptible to fraud, issuing NSF checks and trouble with the tax authorities. Avert these types of embarrassments and financial disasters by performing reconciliations regularly. Their importance cannot be overstated and the benefits are vital to operating a successful organization.

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  • Johanna Kuker

    Johanna Kuker

    Johanna Kuker is a professional accountant and the co-founder of Virtuosi Media. She is married to her husband Benjamin and enjoys traveling, skiing, and most outdoor activities.

    View Johanna's Bio

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