Bank Reconciliation, why and how.

No one likes Bank Reconciliations, well, maybe. Either way, we recognize that they aren’t fun. But they are important. First we will identify why they are important, then we will talk about how to do them. Because if they aren’t done frequently, they only get harder. And we don’t want to end up in the situation like our stock photo above where it becomes an unsurmountable mountain to climb.

Why?

The bank reconciliation is the difference between what has actually happened and what your accounting thinks has happened.

That is important to understand.

Consider a business owner has been working within their Quickbooks and has been writing checks and cashing checks. They are all sitting in Quickbooks. Quickbooks is going to present a balance of, $200,000, for example. Then the business owner looks in their checking account and sees $250,000. So, what is the truth?

They both are.

This is where the reconciliation comes in. It is understanding the differences.

Differences can be caused by:

  • Timing
    • Uncleared checks
    • Uncleared deposits
  • Errors
    • Banking errors
    • Book errors
  • Bank related transactions
    • Fees
    • Interest

By understanding this activity you can better control your cash flows.

How?

  1. Open the bank reconciliation module of your accounting software. Have the bank statement for the period under reconciliation out/open.
  2. Going down the line, of the bank statement, transaction by transaction, within the module check off every check that has cleared the bank as cleared.
  3. Going down the line, of the banks statement, within the module check off every deposit that has cleared the bank.
  4. Enter any transactions that are in the bank statement that were not in the general journal. This may include wire transfers, automatic transactions, and bank fees/interest.
  5. If the ending balance of the bank statement doesn’t match the reconciled general journal amount investigate the following:
    1. Checks recorded in either the bank or general journal at the wrong amount.
    2. Deposits recorded in either the bank or general journal at the wrong amount.
    3. Investigate any other remaining issues.

If the bank made an error, they will need to be contacted. It does happen. So, don’t be afraid to correct it.

As a side note, this is also a good time to identify any old checks still uncleared. Each business is different, but set a period of time, 2 months is probably plenty. Any uncleared check after that time will need to be investigated. Reference our blog on uncleared checks for more details.

When it is all done you should have a report from your software that says the beginning balance, and the ending balance, with a section for uncleared checks. It is important to not dismiss the uncleared checks. Those checks will clear.

Balance                    –  250,000

Uncleared Checks – (200,000)

Available balance    – 50,000

If this is what you see, don’t cut checks that will total more than $50,000, because that is all the cash available.

Helpful hints

The more you do this the better. We know it is a pain, but for our clients we do it weekly. For one, there is only a quarter of the transactions, but it also gives us a weekly clear picture of the exact cash position. If you were to pull statements weekly or daily, but only do the reconciliations monthly you may be in a situation where you think there is $250,000 in the bank, but you forgot about the $300,000 check out there waiting to be cashed.

A bank feed doesn’t eliminate the need for this, unless your business doesn’t use checks. If that is the case, well done. One less thing to worry about.

Best of luck.

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

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