When performing a bank reconciliation, you compare your internal financial records against the records provided to you by your bank. 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.
To reconcile your accounts, compare your internal record of transactions and balances to your monthly bank statement. Go through each transaction individually, making sure the amounts match perfectly and noting any differences to investigate.
You’ll also want to make sure that your bank statements show an ending account balance that agrees with your internal records, or that you have specific explanations for the difference.
The process can be as formal or informal as you’d like, and some businesses create a bank reconciliation statement to document their results. If you don’t do the process monthly, you can perform it daily, quarterly or any other period for which you choose.
Your accounting system should give access to all of the transaction data you need, or you might have your data in a manually-maintained check register. Your bank can provide online access to your account, allowing you to view and download transactions regularly for comparison.
If you’re familiar with balancing your checkbook, then you’re already familiar with bank reconciliation. You’re essentially doing the same thing for the same reason.
It’s normal to see minor differences due to timing, including items that haven’t yet cleared the bank, but you should be able to easily explain those differences. For example, you might write a check to a vendor and reduce your account balance accordingly, but your bank will show a higher balance until it hits your account. These are also known as outstanding checks.
Likewise, an automatic electronic payment might hit your account a day before or after the end of the month, and perhaps you expected to see it in a different month. As long as you can easily account for these discrepancies, there’s probably no need to worry.
The Importance of Reconciling
A regular review of your accounts can help you identify problems before they get out of hand. You won’t receive protection for business bank accounts as you would for consumer accounts under federal law, which means you can’t count on the bank to cover fraud or errors in your account.
Catch Fraud Before It’s Too Late
Make any signs of fraud your priority when reconciling the transactions made in your bank account.
- Were legitimate checks that you issued duplicated or changed, resulting in more money leaving your checking account?
- Were checks issued without authorization?
- Are there unauthorized transfers out of the account, or has anybody made unauthorized withdrawals?
- Does the account have any missing deposits?
Prevent Administrative Problems
Reconciling your account also helps you identify account management or administrative issues that need attention. For example, you might need to reevaluate how you handle cash flow and accounts receivable, or perhaps change your record keeping system and the accounting processes you use.
Proper processes for managing your banking transactions result in outcomes such as the following:
- Knowing how much cash you really have available in your accounts
- Avoiding bounced checks (or making failed electronic payments) to partners and suppliers
- Avoiding bank fees for insufficient funds or using up lines of credit when you don’t really need to
- Knowing if customer payments have bounced or failed and if any action is needed
- Keeping track of your outstanding checks
- Making sure every transaction gets entered into your accounting system properly
- Catching any bank errors
Best Time to Reconcile
It’s wise to review your accounts at least monthly. For high-volume businesses or situations with a higher risk of fraud, you may need to reconcile your bank transactions even more often. Some businesses reconcile their bank accounts daily.
You can also build protection into your bank accounts, and your bank can provide useful ideas. For example, many banks offer a solution called Positive Pay, which prevents your bank from approving payments out of your account unless you have previously notified them of the payment.