Bank reconciliation is a critical process that helps individuals and businesses ensure the accuracy and consistency of their financial records.
It involves comparing the transactions recorded in your bank statement with those in your own accounting records, identifying any discrepancies, and reconciling them to maintain financial integrity.
In this article, we will guide you through the step-by-step process of performing a bank reconciliation.
9 Steps Involves in Bank Reconciliation
Step 1: Gather Necessary Documents
To begin the bank reconciliation process, gather the following documents:
a) Bank Statement
Obtain your most recent bank statement for the account you want to reconcile. This statement can be either a paper statement or an electronic statement downloaded from your bank’s online portal.
b) Accounting Records
Collect your accounting records, including your general ledger, cash receipts journal, and cash disbursements journal. These records should reflect all the transactions made during the same period covered by the bank statement.
Step 2: Compare Opening Balances
Start by comparing the opening balance on your bank statement with the opening balance in your accounting records.
Ensure that both balances match. If they don’t, investigate the reasons for the discrepancy, such as unrecorded transactions or errors in previous reconciliations.
Step 3: Identify Deposits in Transit
Next, compare the deposits recorded in your accounting records with the deposits listed on your bank statement. Look for any deposits that you have made but are not yet reflected in the bank statement.
These are called “deposits in transit.” Note down these deposits as they will need to be included in the reconciliation.
Step 4: Account for Outstanding Checks
Now, review the checks that you have issued and recorded in your accounting records. Compare them with the cleared checks listed on your bank statement. Identify any checks that you have issued but have not cleared the bank yet. These are referred to as “outstanding checks.” Make a note of these checks for the reconciliation process.
Step 5: Check for Bank Charges and Interest
Carefully review your bank statement for any bank charges, fees, or service charges levied by the bank. Compare these charges with your accounting records to ensure accuracy.
Additionally, if your account earns interest, compare the interest earned as per the bank statement with the interest recorded in your accounting records.
Step 6: Reconcile Differences
After identifying deposits in transit, outstanding checks, and accounting for bank charges and interest, it’s time to reconcile the differences between your bank statement and accounting records.
Start with the reconciling items that have a direct impact on the balance. Deduct outstanding checks from the bank statement balance and add deposits in transit to it.
Step 7: Reconcile Additional Items
Sometimes, there may be additional reconciling items that do not directly affect the balance but need to be accounted for.
These can include bank errors, unrecorded transactions, or other adjustments. Make the necessary adjustments in your accounting records to account for these items.
Step 8: Finalize the Reconciliation
Once you have made all the necessary adjustments, compare the adjusted bank statement balance with the adjusted balance in your accounting records. They should now match.
If they do, congratulations! Your bank reconciliation is complete. If not, review your work and double-check for any errors or omissions.
Step 9: Document the Reconciliation
It is crucial to document the bank reconciliation process for future reference and auditing purposes. Keep a record of the reconciliation statement, including the date, the account being reconciled, the reconciling items, adjustments made, and the final reconciled balance.
Performing regular bank reconciliations, ideally on a monthly basis, is essential to maintaining accurate financial records. It helps identify errors, detect fraud, and ensure the integrity of your financial data. By following this step-by-step guide, you can streamline the bank reconciliation process and gain confidence in your financial statements.