Bank Reconciliation

Why Bank Reconciliation is Important

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Your bank's records should match your own records. Howard George / Getty Images

Bank reconciliation is the practice of comparing your records against the bank records. A monthly reconciliation helps you identify any unusual transactions that might be caused by fraud or accounting errors.

What is Bank Reconciliation?

To reconcile your accounts, compare your record of transactions and balances to your monthly bank statement. Go through each transaction individually, making sure the amounts match perfectly.

You’ll also want to make sure that your bank statements show an ending account balance that you agree with.

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, 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 you might have expected to see it in a different month. As long as these discrepancies can easily be accounted for, there’s probably no need to worry.

Why it’s Important to Reconcile

A regular review of your accounts can help you identify problems before they get out of hand.

Business bank accounts are not as protected as consumer accounts under federal law, which means you can’t count on the bank to cover fraud and errors in your account. A drained business account can be devastating.

Catch fraud: one of the main things to look for is any sign of fraud.

  • 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?

Prevent problems: reconciling your account also helps you identify issues that might need attention. For example, you might need to reevaluate how you handle cash flow and accounts receivable, or you might need to change your recordkeeping system and the accounting processes you use.

  • Know how much you really have available in your accounts
  • Avoid bouncing checks (or making failed electronic payments) to partners and suppliers
  • Avoid bank fees for insufficient funds or going into lines of credit when you don’t really need to
  • Know if customer payments have bounced or failed and if any action is needed
  • Keep track of your outstanding checks
  • Make sure everything is going into your accounting system properly
  • Catch bank errors

When to Reconcile

It’s wise to review your accounts at least monthly. For high-volume businesses or situations where fraud is a risk, more often is better. Some businesses reconcile their bank accounts daily. You can also build protection into your bank accounts – ask your bank for ideas. One solution is Positive Pay, which many banks offer, preventing your bank from approving payments unless you have previously notified them of the payment.

How to Reconcile

The process can be as formal or informal as you like. Some businesses create a bank reconciliation statement, but the most important thing is to review each and every transaction from each source (your records and the bank’s records): match those transactions, and compare your account balance at the end of each period. Again, the period could be monthly, daily, or any other period you choose.

Where can you find the information you need? Your accounting system should have everything you need, or you might just keep it in a check register. Your bank should provide online access to your account, allowing you to view and download transactions regularly.

For a more detailed explanation, along with sample templates (in electronic and paper form) see how to balance a bank account.