How to do a bank reconciliation

Sometimes your current bank account balance is not a true representation of cash available to you, especially if you have transactions that have not settled yet. If you’re not careful, your business checking account could be subject to overdraft fees.

You should perform monthly bank reconciliations so you can better manage your cash flow and understand your true cash position. Read on to learn about bank reconciliations, use cases, and common errors to look for.

• Review: What are bank reconciliations?
• Bank reconciliation use cases
• When to do a bank reconciliation
• How to do a bank reconciliation
• 1. Compare your bank statements
• 2. Add bank-only transactions to your book balance
• 3. Add book transactions to your bank balance
• 4. Compare both adjusted balances
• Common errors and how to avoid them

Review: What are bank reconciliations?

To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another. More specifically, a bank reconciliation means balancing your bank statements with your bookkeeping. 

Bank reconciliation use cases

A bank reconciliation is a process of matching the balances in a business’s accounting records to the corresponding information on a bank statement. The goal of the bank reconciliation process is to find out if there are any differences between the two cash balances. If there are any discrepancies, you’ll have to recheck your company’s accounting records. Bank reconciliations allow you to:

• Prevent common accounting errors: Common accounting errors take place anytime during the accounting process but are most prominent during the data entry phase. We’ll dive into these more later.
• Check for accurate information: Apart from accounting errors, the wrong information can find its way onto your statements. For example, getting overcharged or charged the wrong amount can create an imbalance in your records.

When to do a bank reconciliation

We strongly recommend performing a bank reconciliation at least on a monthly basis to ensure the accuracy of your company’s cash records. A monthly reconciliation helps to catch and identify any unusual transactions that might be caused by fraud or accounting errors, especially if your business uses more than one bank account.

How to do a bank reconciliation

You’ll need a few items to perform a bank reconciliation, including your bank statement, internal accounting records, and a record of any pending cash transactions (either inflows or outflows). This will make the reconciliation process much easier.

Note that this process is exclusively for reconciliations performed by hand. If you use accounting software, then your reconciliation is done largely for you. However, as a business owner, it's important to understand the reconciliation process.

1. Compare your bank statements

The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match.

• Go through each transaction individually, looking for exact matches.
• Note any differences between the records and the statements.
• Investigate the discrepancies to ensure it was human error rather than foul play.

2. Add bank-only transactions to your book balance

There are bank-only transactions that your company’s accounting records most likely don’t account for. These transactions include interest income, bank deposits, and bank fees.

1. Begin by adding positive transactions: An example of a positive transaction would be interest income earned from your bank throughout the period. (Usually, one period equals one month.) 
2. Subtract negative transactions: An example would be bank service charges from your book cash balance.

There will be very few bank-only transactions to be aware of, and they’re often grouped together at the bottom of your bank statement.

3. Add book transactions to your bank balance

Book transactions are transactions that have been recorded on your books but haven’t cleared the bank. As a small business, you may find yourself paying vendors and creditors by issuing check payments. 

When a check is issued, your bank statement won’t reflect the outstanding checks if they haven’t been cashed yet. On the flip side, your bank statement may not show deposits if they’re still being processed by the bank. Here’s what to do with those deposits:

• Record as an inflow if it’s a bank deposit that’s in transit, and add it as an inflow to the bank balance
• Record as an outflow if it’s an outstanding check, and subtract it from the bank balance as an outflow

Remember that transactions that aren’t accounted for in your bank statement won’t be as obvious as bank-only transactions. This is where your accounting software can help you reconcile and keep track of outstanding checks and deposits. Most reconciliation modules allow you to check off outstanding checks and deposits listed on the bank statement.

4. Compare both adjusted balances

Finally, compare your adjusted bank balance to your adjusted book balance. Since you’ve already adjusted the balances to account for common discrepancies, the numbers should be the same. 

If not, you’re most likely looking at an error in your books (or a bank error, which is less likely but possible). If you suspect an error in your books, see some common bank reconciliation errors below.

Common errors and how to avoid them

If your balances don’t match, there are some common accounting errors to look for in both your accounting records and your bank statements. They include:

• Data entry errors
• Omission errors
• Transposition errors
• Fraudulent transactions
• Beginning cash balances

Data entry error

Data entry is the process of entering data into a system, either by hand or through automation. Although automation has less risk of human error than performing the task by hand, there are always possibilities. Some common data entry errors include:

• Entering the wrong number
• Entering the right number in the wrong order
• Entering words instead of numbers  

How to avoid:

• Double-check your entries
• Use automation 
• Aim for accuracy, not speed

Omission error

Omission errors are when numbers or entries are forgotten. This is also known as a false negative. Numbers that don’t make it into the database can potentially impact the data’s integrity. Some common omission errors include:

• Not entering an employee's salary
• Not entering a sale
• Not entering a transaction 

How to avoid:

• Double-check your entries
• Use automation 
• Aim for accuracy, not speed

Transposition error

This is a simple data entry error that occurs when two digits are accidentally reversed (transposed) when posting a transaction. For example, you wrote a check for $32, but you recorded it as $23 in your accounting software. 

How to avoid:

• Print checks directly from your accounting system

Fraudulent activity

Fraudulent transactions can happen in your own books or through the banking system. Either way, it will compromise your company's financial integrity and potentially cost you. Here are two separate examples of where this might occur:

• Fraudulent bank activity: For example, a hacker has gotten access to your bank account and has started making small incremental withdrawals that won’t be noticeable in the day-to-day. A reconciliation can catch these charges, and if done early enough, can allow you to alert the bank and remedy the situation.
• Fraudulent bookkeeping activity: For example, an employee has overstated revenue or didn’t record expenses accurately, causing the books to look like the company is earning more than it is. A reconciliation can bring these discrepancies to light.  

How to avoid:

• Minimize who has access to accounts
• Choose a bank that is FDIC insured
• Choose a bank that offers fraud protection

Beginning cash balances

If your beginning balance in your accounting software isn’t correct, the bank account won’t reconcile. This can happen if you’re reconciling an account for the first time or if it wasn’t properly reconciled last month. You may need to go back to previous months to locate the issue.

How to avoid: 

• Always check your beginning cash balance and match it up with the previous month’s ending balance

Checks and balances

It’s important to perform a bank reconciliation periodically to identify fraudulent activities or bookkeeping and accounting errors. This way, you can ensure your business is in solid standing and never be caught off-guard.

For a more hands-off reconciliation experience, QuickBooks can help. We offer reconciliation reports, discrepancy identification, and live accountants to work with for ease and confidence when closing your books.