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Bank reconciliation statements can seem confusing. However, learning how to reconcile a bank statement is easy once you understand the possible reasons for differences between ending balances in the bank statement and the cashbook.

In this guide, I explain the two types of differences and how to deal with them, as well as how to prepare a bank reconciliation statement from scratch. Let’s dive in.

What is Bank Statement Reconciliation?

Bank statement reconciliation is the process of summarizing the transactions in your business’s bank account to ensure all transactions are accounted for in your financial records. 

Why would there be differences in the ending balance of the bank account in the cashbook and the bank statement, you ask? Most commonly:

  • Uncleared checks
  • Errors in data entry
  • That scary business phantom, fraud

Why is Bank Statement Reconciliation Important?

Bank statement reconciliation is important for three reasons:

  • Account for temporary differences like uncleared checks
  • Discover errors in internal records
  • Identify fraudulent transactions in the bank account

Suppose you’ve recorded a debtor as paid, as you’ve sent off the payment already. You recorded the payment in the debtor’s account when you sent the check, but the debtor hasn’t cashed the check yet. This means your bank account balance will be higher than the balance in your books.

When you finish preparing a bank reconciliation statement, you’ll have adjusted for all such differences and the adjusted bank and book balances will match.

However, there are some issues that won’t come out in the wash. Differences could emerge from errors and fraud as well, and they won’t be able to be reconciled. If this happens, it’s important to investigate further.

What You Need To Reconcile a Bank Statement

You need two things to reconcile a bank statement:

  • Bank statement (of course)
  • The bank account in your ledger that includes transactions like deposits, withdrawals, and cleared checks

I’d also argue that an accounting software solution is arguably necessary, to automate the bank reconciliation process.

Who’s Involved in Bank Reconciliation?

The main participants in bank reconciliation include:

  • Accountant or bookkeeper: Your company’s accountant or bookkeeper prepares the bank reconciliation statement.
  • Bank: You need monthly statements from your bank to perform reconciliation. You can give the bank standing instructions to automatically send a statement every month, or request it on an as-needed basis.
  • Treasurer or financial officer: If you’re reading this, then this person could be you. This is a qualified professional from your company, who will review the reconciliation statement to ensure all discrepancies are addressed.

Other participants include:

  • Internal auditor: The internal auditor may review the reconciliation process to check that effective controls are in place and being followed.
  • External auditor: An external auditor may review the reconciliation statement when assessing the company’s financial statements.
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How To Reconcile a Bank Statement

Now that we’ve covered the basics, let’s dive into the process of creating a bank reconciliation statement. Remember, you don’t need to perform reconciliation manually. Software can do that for you. 

But, hey, I get it if you’re interested in understanding how a bank reconciliation statement is prepared, to help you analyze it more effectively.

1. Gather Resources

You need bank statements for the period of reconciliation, as well as the internally maintained account of the company’s bank account.

2. Match Deposits and Withdrawals With Debits and Credits in the Cash Account

Deposits and receipts appear on the credit side of the bank account in your ledger, while withdrawals and payments appear on the debit side. Match each transaction in the bank statement with those in the bank account in your ledger.

Author's Tip

Author's Tip

Put a checkmark against transactions recorded accurately in the ledger account as well as the bank statement. It’ll keep you organized and motivate you by showing your progress through the task.

3. Find Differences

Transactions that are missing from either your bank statement or your ledger are the differences you need to account for. Coming back to the example of a check that’s been sent but not cleared, you’d record the transaction in the bank reconciliation statement.

Differences may be of the following types:

  • Temporary: Temporary differences adjust automatically over time and don’t require you to pass a journal entry. For example, uncleared checks will clear at some point.
  • Errors and omissions: Permanent differences result from omitted transactions or errors when recording the transactions. To fix a permanent difference, you need to pass a journal entry. For example, if you haven’t recorded bank fees, you’ll need to pass a journal entry because the fee isn’t going to be reversed.

4. Pass Adjusting Journal Entries

Pass a journal entry for errors and omissions you found during the previous step. This will ensure your accounting records are accurate. Temporary differences will diminish over time.

Bank Reconciliation Example

Suppose you have $15,250 in your bank account as of December 31. The book balance of your bank account on the same day is $15,425. Comparing the bank statement and bank account in your general ledger reveals the following differences:

  • Checks received but not deposited (also called deposit in transit): $925
  • Checks issued but not cleared: $1,050
  • Bank service fee: $200
  • Interest income: $500
  • Overdraft fee: $100
  • NSF checks: $500

Here’s what the bank reconciliation statement would look like based on this information:

XYZ Company

Bank Reconciliation Statement

Quarter Ended December 31, 2023

Bank statement balance, December 31, 2023$15,250
Add: Deposit in transit$925
Deduct: Outstanding checks($1,050)
Adjusted bank balance$15,125
Cash balance as per accounting records, December 31, 2023$15,425
Add: Interest income$500
Deduct: Bank service fee($200)
Deduct: Overdraft fee($100)
Deduct: NSF checks($500)
Adjusted book balance$15,125

If the adjusted balances match, you’ve prepared the bank reconciliation statement correctly in most cases — rarely, the adjusted balances may match because of arithmetic or other errors even when you haven’t prepared the statement correctly. And don’t forget to pass the journal entries for errors and omissions.

How Often to Reconcile Bank Statements

Banks typically issue statements monthly, which makes monthly a standard frequency for bank reconciliations. It also ensures you’re not letting discrepancies, errors, or fraudulent transactions linger for too long.

Monthly reconciliation is not a hard rule. Depending on the volume of transactions and your business preferences, you may choose to prepare bank reconciliation statements daily, weekly, or quarterly.

Best Practices When Reconciling a Bank Statement

Here are some best practices to follow when reconciling a bank statement:

1. Maintain Detailed Documentation

Organize and store transaction receipts, invoices, deposit slips, and other relevant documents you might need for reconciliation, preferably on a secure digital platform. Here’s how you stand to benefit:

  • Audit trail: Access to documentation makes it easier for internal and external auditors to trace and verify transactions.
  • Faster error correction: When you find errors, you can look at the relevant document to record the correct figures and details. For example, when you pay using a debit or credit card, the transaction in the bank statement says you paid $100 to XYZ company, but you might not remember for what unless you have the invoice.

2. Segregate Duties

Put different people in charge of recording transactions and reconciling bank statements — in fact, consider segregating duties throughout the steps involved in the accounting cycle. Duty segregation is an important internal control to minimize the risk of fraud and errors. Here’s how segregating duties helps:

  • Fraud prevention: Manipulating business records is more challenging when there is more than one person involved in the process.
  • Accountability: It also establishes accountability because there’s clarity on who’s responsible for each part of the process.

3. Investigate Discrepancies

If you see any suspicious transactions, verify them. Is the figure correct? Is the correct account credited for receipts? Should a check have been cleared by now, but hasn’t? Investigate these discrepancies to ensure you’re not dealing with fraud or misappropriation of funds. 

Turning a blind eye for too long to suspicious transactions and assuming they’re normal just because the numbers add up is a big mistake.

Here’s why you should be quick to investigate:

  • Prevent major problems: Quickly identifying and resolving discrepancies helps you address problems before they turn into something bigger.
  • Maintains the integrity of financial statements: Investigating suspicious transactions keeps your financial records accurate and reliable, which helps maintain the integrity of financial statements.

4. Automate Your Reconciliation Process

Manually reconciling bank statements can take hours or even days. Instead of wasting hours on matching transactions, put your team in charge of monitoring unusual transactions and improving the efficiency of the accounting function by automating the bank reconciliation process.

Software solutions can match transactions automatically, flag discrepancies for review, and generate the reconciliation statement with little to no intervention. Here’s how automation can help you:

  • Efficient reconciliation: Software solutions can reconcile bank statements in real time — no need to spend hours comparing transactions in your ledger and bank accounts.
  • Minimal errors: Automated accounting systems are less prone to errors. Fewer errors translate to less time spent fixing them.

Bank Reconciliation Demystified

Bank reconciliation statements aren’t talked about as much as the income statement and balance sheet. However, they’re critical fraud detection and accuracy tools. 

They help you discover transactions you may have missed, detect fraudulent activity, and understand why there’s a difference between your bank account and the cashbook.

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Arjun Ruparelia
By Arjun Ruparelia

Arjun is an accountant-turned-writer. After a stint in equity research, he switched to writing for B2B brands full-time. Arjun has since written for investment firms, consultants, and SaaS brands in the Accounting and Finance space. He loves chatting about business, balance sheets, and burgers.