What is Bank Reconciliation?

Cash flow keeping you up at night? It could be time to compile a bank reconciliation statement. This document will help you create an overview of your cash flow in greater detail—and manage your finances more effectively.

But what is a bank reconciliation statement, anyway?

Companies all over the world—including right here in the Philippines—use bank reconciliation statements to compare the cash flows in their internal accounting records (their ledgers, or ‘cash books’) with their bank account statements. They want to make sure everything matches up.

But a bank reconciliation statement isn’t just for making sure small sums aren’t slipping through the cracks. They can also have tax implications, too. So knowing how to reconcile a bank account is an important skill.

And we’re here to demystify it. Let the QuickBooks experts break down everything you need to know about bank reconciliation and arm you against financial headaches. 

Let’s get stuck in!

In this article, you will learn:

• How to perform a bank reconciliation
• Why bank reconciliation is important for businesses
• Bank to book vs book to bank reconciliation: What’s the difference?
• Common issues in bank reconciliation
• How often should bank reconciliation be done?
• Conclusion: The purpose and benefits of regular bank reconciliation

How to perform a bank reconciliation

It’s clear that bank reconciliation is an important process every Philippine business should take. Especially those struggling with cash flow problems—the purpose of bank reconciliation is to help you clear up your finances.

But preparing a bank reconciliation statement can be a fiddly process. Not necessarily difficult, but fiddly. There are a lot of moving parts to keep an eye on.

We’re going to break down exactly how to reconcile a bank account. But it’s worth noting that if you’re not one for numbers, professional services and cutting-edge accounting software can do the heavy lifting for you!

• Gather documents: You’ll need two main types of docs. Those are your bank statements (preferably just one if you’re doing your reconciliation monthly) and your company's cash book or ledger.
• Compare beginning balances: Important, but often overlooked. Make sure the opening balance in your cash book matches the previous period's reconciled bank balance!
• Match transactions: Go through your deposits and withdrawals, both in your statement and your ledger. Mark transactions that match up.
• Identify discrepancies: Keep an eye out for missing transactions. Either outstanding cheques or deposits in transit.
• Check for bank errors: It’s unlikely, but banks do sometimes make mistakes. Look out for duplicate charges or incorrect amounts.
• Adjust the cash book/bank balance: Record any transactions that weren’t included in either your ledger or the bank balance—including outstanding payments—and calculate an adjusted bank balance.
• Double-check final balances: At this point, your adjusted cash book balance and bank balance should match up perfectly. 
• Document the reconciliation: It’s always a good idea to keep a record of your reconciliation—both for audits and your own use later on!

Bank reconciliation example: A simple walkthrough

Hopefully, bank reconciliation is all becoming clear. To help lift the fog even further, let’s explore an in-depth (but simple) bank reconciliation example. This should help you see the process in action.

Okay, here’s the setup: ABC Trading is a Philippine company. It’s time for their accountants to sit down and reconcile ABC’s bank statement for March 2025. The company’s cash book shows an ending balance of ₱100,200, the bank statement shows ₱91,200. Something’s not right.

Step 1: Compare transactions

ABC goes through and finds the following discrepancies:

• A customer payment of ₱15,000 deposited on March 30 is still in transit. This means it’s not reflected in the bank statement.
• A cheque for ₱8,500 issued to a supplier has not cleared. It’s outstanding.
• The bank deducted a service charge of ₱250. Of course, this isn’t in the company ledger.
• The bank statement shows an automatic loan payment of ₱3,000. Again, this isn’t in the cash book.
• The company earned ₱750 in interest, also not in the ledger.

Step 2: Adjust the bank balance

Now it’s time to do some sums:

ABC’s bank balance is ₱91,200. However, they have ₱15,000 worth of deposits in transit (they haven’t landed in the account yet). So ABC can adjust their balance to ₱106,200. 

But hang on! There are also outstanding cheques of ₱8,500. ABC now has to deduct that number from the balance, and gets ₱97,700. That’s their adjusted bank balance.

Step 3: Adjust the cash book

ABC’s cash book shows a ₱100,200 total. But the ₱250 bank service fee and ₱3,000 loan repayment have to be taken off. That leaves ₱96,950.

They add the ₱750 interest earned, and get a round  ₱97,700.

Perfect! All ABC Trading now has to do is record the reconciliation and move on.

Why bank reconciliation is important for businesses

So you know what the purpose of bank reconciliation is. And you’ve seen a handy bank reconciliation example. Now, let’s turn to why Philippine businesses should take reconciliation seriously, plus the major benefits it brings:

• Error detection and correction: Small discrepancies between books are nothing unusual. But if left unchecked, they can add up. That can cost businesses big bucks in the long run. It’s crucial to identify mistakes and address them ASAP.
• Fraud prevention: Even if you don’t suspect fraud, it doesn't hurt to make sure. If there are unauthorised transactions or fraudulent withdrawals going on, it’s better to investigate it immediately to avoid financial blows.
• Identifying outstanding transactions: Reconciliation helps show outstanding cheques and deposits in transit. This makes sure you’re not overestimating your available cash.
• Managing cash flow: Want a clearer picture of cash availability? Accurate reconciliation is the answer. Businesses can track payments and expenses more effectively, leading to better budgeting and financial planning.
• Compliance: Compliance can be a headache, true. But it’s important to make sure everything’s above board at all times. Proper reconciliation helps guarantee compliance with accounting standards and tax regulations.

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

If you’re looking into bank reconciliation, you’ve probably noticed the terms ‘book to bank reconciliation’ and ‘bank to book reconciliation’ cropping up. But what’s the difference?

Well, essentially, both book to bank and bank to book reconciliation have the same goal: to balance your books and accounts. But they come at it from different perspectives:

Bank to book reconciliation

Bank to book starts with the bank statement. We adjust the bank statement to match the company’s cash book balance. But the process is more or less the same: go through the books and add and subtract outstanding transactions, along with any bank errors or fees.

Use bank to book reconciliation:

• When you want to verify the bank’s accuracy.
• When you want to identify missing transactions in your ledger.
• When reconciling cash accounts with a focus on external records.

Book to bank reconciliation

Basically, book to bank is the other way around. You would take your company cash book/ledger and adjust it for items found in the bank statement. That could include bank charges, direct deposits withdrawals, etc.

Use book to bank reconciliation to:

• Verify your company records against the bank.
• Identify unrecorded bank transactions in your cash book/ledger.
• Focus on accounting accuracy and internal control.

So while both bank to book and book to bank ultimately serve to balance your accounts, they may be used for slightly different purposes. 

Bank reconciliation statement format and sample

There are a few ways to lay out a bank reconciliation statement, each of which is fairly straightforward. It all comes down to personal preference.

For most business, though, a simple statement in this format does the job:

And here’s a handy bank reconciliation sample which gives you an idea how this look sin practice:

Common issues in bank reconciliation

Struggling to make your figures play ball? Don’t worry: you’re not alone. Creating an accurate bank reconciliation statement isn’t always easy, even when you know how.

There are myriad issues which can arise—issues which give businesses just like yours headaches every day. Here are a few examples:

• Outstanding cheques: ‘Outstanding’ just means cheques issued but not yet cleared by the bank. They’re common and can cause serious head-scratching as they create a temporary mismatch between ledgers and bank statements. However, as long as you track outstanding payments, you should be fine.
• Deposits in transit: Similar to outstanding cheques. They’re deposits which, again, haven’t yet been processed by the bank. And again, this creates a discrepancy. This is a particular problem when deposits are made near the end of the month. 
• Bank fees and charges: People often forget that most banks charge for certain services. And of course, these fees don’t feature in company cash books.
• Errors in recording transactions: Of course, human error can cause big problems, too. Even small mistakes when entering amounts or duplicating entries, for instance, can create large ripples.
• Unauthorized transactions, fraud: Hopefully you won't come up against this kind of problem. But if you do, better to face it head-on. Reconciliations can occasionally uncover things like unauthorised withdrawals, for example. This can be a big shock, but regular reconciliation helps to address it promptly!

How often should bank reconciliation be done?

Ideally, businesses of all sizes should aim to make a bank reconciliation statement at least once a month. Usually at the end of each accounting period when bank statements are issued. 

That said, that might not cut it for businesses with higher transaction volumes. Some businesses perform bank reconciliations every week—or even every day. But don’t worry about the workload: accounting software can help alleviate that!

Consistency is the key thing. It’s important because it:

• Prevents errors from piling up: Better to catch mistakes early than let them build up and cause real headaches later down the line, right?
• Detects fraud and unauthorized transactions: If something fishy’s going on, you’ll want to know about it ASAP.
• Improves cash flow management: Staying on top of financial comings and goings helps you make better financial decisions and avoid cash flow challenges.
• Ensures compliance and audit readiness: Consistent reconciliation helps businesses maintain accurate financial records. Crucial for tax reporting and compliance.

Conclusion: The purpose and benefits of regular bank reconciliation

Hopefully, we’ve clued you up on how to reconcile a bank account and the purpose of bank reconciliation. To recap:

Bank reconciliation should be done monthly to help reduce cash flow friction, prevent fraud, avoid costly errors, and ensure long-term compliance. Although creating a bank reconciliation statement can be fiddly, it’s really nothing to worry about. There are tonnes of great resources—including ready-made reconciliation statement templates—available on the web.

But you’ll need to be careful. Bank reconciliation requires a keen eye and meticulous attention to detail. So stay alert!

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