What is Bank Reconciliation?

Have you ever found yourself dealing with unexplained cash flow discrepancies? You’re not alone, around 70% of all Malaysian SMEs are in the same boat. The answer could be bank reconciliation.

When a business makes a bank reconciliation statement, it matches its financial records with its bank statements, usually from local banksm like Maybank, CIMB, or RHB. This ensures that every ringgit going in or out of your business is accurately recorded and accounted for.

Knowing how to reconcile a bank account not only keeps your cash flow precise but also supports LHDN compliance efforts and helps to prevent discrepancies, like duplicates, bank fees, or missing transactions.

With that in mind, there are two main benefits of bank reconciliation. One is that it gives you a clear, up-to-date cash flow overview. The other is that reconciliation keeps you on the right side of LHDN regulations.

How to perform a bank reconciliation

Even though making a bank reconciliation statement involves juggling lots of moving parts, the whole process is actually relatively straightforward.

Here’s how it goes:

1. Obtain your bank statement: Download your latest bank statement from your online banking portal. This should show all your transactions.
2. Compare with your accounting records: However you keep your records, whether manually or through QuickBooks, go through them and make sure the statement matches your books.
3. Match transactions: Go through each transaction and match deposits, withdrawals, fees, and transfers listed in your bank statement with those in your accounting system.
4. Identify discrepancies: There will usually be some discrepancies, like missing entries or unrecorded bank fees. Whatever they are, find them.
5. Make adjustments: Take those discrepancies from the last step and factor them in, then update your records to reflect any missing or incorrect entries.
6. Reconcile and document: Finally, make sure your adjusted book balance matches the ending bank balance. Document the reconciliation for future audits or reference.

If you’re thinking that’s easier said than done, you’d be right. Gathering and comparing dozens, even hundreds, of transactions is no mean feat. That’s why many Malaysian SMEs use automated accounting software like QuickBooks.

QuickBooks does the hard parts, from data entry to bank feed analysis, for you, so you can focus on growing your business.

Bank reconciliation example: A simple walkthrough

Let’s explore a bank reconciliation example in a Malaysian context:

In this scenario, you’re reconciling your company’s current account for the month of May. Your opening balance (the balance you started out with) in both your accounting records and your bank statement is RM5,000.

1. Match deposits: Your books show a customer payment of RM2,000. You can see the same deposit on your Maybank statement.
2. Match payments: You made a payment to a supplier for RM1,000. Both your books and the bank statement reflect this transaction. 
3. Spot discrepancies: Now, you notice a RM10 bank service fee charged on May 25th by Maybank. As this was a bank fee, not a business transaction, it won’t be in your company’s books.
4. Adjust records: Next, you would simply record the RM10 bank fee in your accounting system to align your records with the bank statement.
5. Final reconciliation: Now, your records should show:
6. Opening Balance: RM5,000
7. + RM2,000 (Deposit)
8. - RM1,000 (Payment)
9. - RM10 (Bank Fee)
10. = Adjusted Closing Balance: RM5,990 (which matches your bank statement perfectly)

Okay, that’s a fairly simple example. In reality, especially for medium and large-sized companies, bank reconciliations may be a lot more complex and take a lot more time. 

That’s where accounting software like QuickBooks comes in. If you had been using QuickBooks for this bank reconciliation, the software would have automated much of the process.

For example, by importing your bank feed via CSV or integrations, QuickBooks would automatically detect the missing RM10 fee and flag it as a transaction requiring attention. 

Why bank reconciliation is important for business

You already know the purpose of bank reconciliation, but why is that such an important step for Malaysian SMEs? What difference does it really make to your business?

Here’s why it’s so important:

• Error detection: The whole point of reconciliation is to catch duplicate payments, incorrect entries, or forgotten bank charges early on, before they can cause problems. For businesses still using manual payments or accepting cheques from suppliers, it’s also an effective way to catch bounced checks or delayed deposits that could affect your cash flow.
• Fraud prevention: Keeping your accounts safe is a top priority for any business owner. Bank reconciliations help with this by detecting unauthorised or suspicious activity before it snowballs, especially in a digitalizing age of e-wallets and FPX gateways.
• Streamlining tax: When your records and statements match up, it makes your tax process a whole lot smoother. Cut out the hours spent on tax documentation and rest easy knowing it’s taken care of.
• Financial health: Not only does reconciliation give you a more accurate picture of your cash flow, it also helps your financial health in another, less obvious way. Clear financial records go a long way when applying for business loans or preparing for an audit by LHDN. Do yourself a favor and keep your finances precise, it could pay off later.

In short, bank reconciliations are helpful for you, not just the authorities. They keep your business flexible and healthy and ensure better, smoother operations. All it takes is a little work once a month.

Bank to book vs book to bank reconciliation: What’s the difference?

You may have already realized that there are two ways to go about bank reconciliation. We call these two methods book to bank reconciliation and bank to book reconciliation. 

Both have the same aim, but where we start differs:

• Bank to book reconciliation: As you might have guessed from the name, this method starts with the bank statement. You then adjust your internal records to reflect what the bank shows. If your business relies heavily on bank transactions for tracking finances, like if you’re a freelancer or a small online seller, this could be the way forward. It helps you catch up and align your finances, without keeping detailed ledgers.
• Book to bank reconciliation: However, if you do keep detailed internal records, you may want to go about it the other way. Starting with your accounting records and then matching them against your bank statement is a book to bank reconciliation.

This method ensures your internal records are complete, then helps you verify their accuracy against the bank’s version.

Now for the big question, which bank reconciliation process should you use? It all depends on how your business operates. If your records are basic and your finances are mostly bank-driven, use bank to book. If you use sophisticated internal accounting software, like QuickBooks, and in-depth transaction tracking, go for book to bank.

Bank reconciliation statement format and sample

A good bank reconciliation statement is clear and concise. It shows exactly what’s going in and what’s coming out without overcomplicating the matter. You want to be able to visualize how differences, like bank fees, SST payments, or FPX charges, are identified and adjusted. For instance, if you missed recording a bank fee or an SST payment in your books, these would be deducted to reconcile the actual cash available.

For most Malaysian SMEs, the format will look like this:

Below is a bank reconciliation sample to demonstrate what a real statement might look like:

Here, you can see that the opening balances of the bank statement and cash book didn’t match. With adjustments, however, they lined up perfectly.

Using software like QuickBooks can simplify this process by auto-generating reconciliation statements and flagging items such as missing fees or outstanding checks.

Common issues in bank reconciliation

With tools like QuickBooks by your side, bank reconciliation is extremely straightforward. However, when reconciling manually, there are a few things which can, and often do, go wrong.

Here’s are some common issues with bank reconciliation:

1. Uncleared or outstanding cheques: These are payments you’ve recorded in your books, but the bank hasn’t yet cleared. These can cause your book balance to appear lower than your bank statement.
2. Timing differences: Some platforms may process customer payments a day or two after you've issued an invoice. That can lead to temporary mismatches.
3. Recurring transfers (auto debits): You’re probably not including things like loan repayments or payroll payments in your ledger. However, they will show up in your bank statement.
4. Bank fees: Most major banks charge small fees. It’s easy to forget about these and be left trying to match minor discrepancies for hours. Likewise, reversed transactions sometimes wreak havoc.
5. Foreign currency transactions: When dealing internationally, it’s important to remember that exchange rates vary, even between the time of transaction and settlement.

How often should bank reconciliation be done?

The most important thing isn’t necessarily how often you reconcile your bank statements, but how consistently you do. For the sake of clean financial records, the best practice is to perform bank reconciliations at consistent intervals.

That said, you shouldn’t leave it too long between reconciliations.

For most Malaysian SMEs, a monthly reconciliation is sufficient. This aligns well with SST filing cycles and helps ensure your financial reports are up to date for tax compliance and audits.

However, if you operate a particularly high-volume business, it’s best to reconcile weekly or even bi-weekly. This helps catch issues early, like duplicate payments, bounced checks, or unrecorded bank charges, before they escalate.

In short, we’d recommend reconciliations at least once a month.

The process doesn’t need to weigh on you, as QuickBooks can greatly simplify this process. The platform can connect with Malaysian bank accounts, allowing you to automatically pull in transactions.

Conclusion: The purpose and benefits of regular bank reconciliation

Regular bank reconciliation isn’t just for LHDN’s benefit, it’s actually a vital part of business planning, too. Bank reconciliation gives you the opportunity to monitor cash flow and catch any minor issues before they become major problems. It is also a matter of sound financial management.

Don’t forget, consistent reconciliation also builds trust with stakeholders. By reconciling, you’re demonstrating to investors, banks, and the government that you’re financially responsible and accountable. That goes a long way, especially if you later need a loan.

You don’t have to tackle complex bank reconciliations alone, either. With state-of-the-art tools like QuickBooks, you can automate much of the process. Save time, reduce manual work, and enable faster, smarter decision-making. See for yourself, try QuickBooks for free today!