What Is a Bank Reconciliation Statement, and How Is It Done?

Bank reconciliation is one of the most important tasks in accounting, but many business owners don’t fully understand it. If your company handles money, and nearly all do, then you need to make sure your bank statement matches your records. Why? Because mistakes can happen. Payments may not clear, bank fees might be missed, and errors could go unnoticed. Regular bank reconciliations help keep your finances accurate, organized, and fraud-free. In this blog, we’ll explain everything you need to know about bank reconciliations in simple terms, including what they are, how they work, and why they matter.

What Is Bank Reconciliation?

Bank reconciliation is the process of comparing your business’s internal financial records with your bank statements. The goal is to make sure the numbers match. If they don’t, you find out why and fix it.

Your business may have recorded a check, for example, but the bank hasn’t cleared it yet. Or the bank may have charged a fee that you forgot to record. These differences are common and expected. Bank reconciliation helps you catch them early and keep your books accurate.

This process is typically done monthly, right after receiving your bank statement.

Why Is Bank Reconciliation Important?

Here are the top reasons why every business, big or small, should perform regular bank reconciliations:

1. Catch Errors Early

Mistakes happen. Maybe someone typed in the wrong amount, or the bank made an error. Reconciliation helps catch these issues quickly.

2. Prevent Fraud

Regular checks help prevent unauthorized transactions. If someone writes a fake check or transfers money without permission, you can catch it during reconciliation.

3. Stay on Top of Cash Flow

Knowing your real cash balance helps you make better decisions. If your books say you have more money than you actually do, you might overspend.

4. Prepare for Tax Time

Accurate records make it easier to file taxes. Plus, you’ll have fewer surprises when it comes to your bank balance and business performance.

5. Build Financial Confidence

Bank reconciliations help business owners, investors, and lenders trust your financial reports. That trust can lead to better opportunities.

Common Terms to Know

Before diving deeper, here are some basic terms that come up in bank reconciliation:

• Bank Statement: A report from the bank that lists all transactions for a certain period.
• Cash Book: Your business’s own record of cash transactions.
• Outstanding Checks: Checks your business has written but that haven’t been cashed yet.
• Deposits in Transit: Money you’ve deposited but that the bank hasn’t yet processed.
• Bank Charges: Fees from the bank for things like overdrafts or maintenance.
• Errors: Mistakes in the bank’s records or your own.

Step-by-Step: How to Do a Bank Reconciliation

Follow these simple steps to reconcile your bank statement:

Step 1: Gather Your Records

Collect your bank statement and your internal cash records for the same time period. You can use software like QuickBooks, Xero, or even a spreadsheet.

Step 2: Compare Deposits

Look at every deposit listed in your bank statement and make sure it matches what you have in your books. Note any deposits that are missing or different.

Step 3: Compare Payments

Check every withdrawal, check, or payment. See if it matches your records. If a check hasn’t cleared yet, list it as an outstanding check.

Step 4: Adjust the Bank Statement

Add deposits in transit (deposits you made but that haven’t shown up in the bank yet). Subtract any outstanding checks. This gives you an “adjusted” bank balance.

Step 5: Adjust Your Books

Now do the same for your business’s records. Add interest earned or deposits the bank shows that you didn’t record. Subtract bank charges, bounced checks, or errors.

Step 6: Compare the Final Balances

Your adjusted bank balance and your adjusted cash book balance should now be the same. If not, look again for missed items or errors.

Step 7: Record the Adjustments

Update your accounting system to reflect the changes you found. This keeps your books accurate going forward.

Example of a Bank Reconciliation

Let’s say your business bank statement shows an ending balance of $5,000. But your cash records say $5,400.

Here’s what you find:

• You wrote a check for $600 that hasn’t cleared yet.
• You deposited $500 that the bank hasn’t processed yet.
• The bank charged a $20 fee you didn’t record.
• You earned $120 in interest that you forgot to add.

Adjusted Bank Statement:

• Starting Balance: $5,000

• $500 (deposit in transit)
  ? $600 (outstanding check)
  = $4,900

Adjusted Cash Book:

• Starting Balance: $5,400
  ? $20 (bank fee)

• $120 (interest earned)
  = $5,500

Still not matching? There may be a $600 check recorded twice in your books. Once you fix that error, both balances align at $4,900.

Common Issues Found During Reconciliation

Here are some common problems you might run into and what they mean:

1. Outstanding Checks

These are checks that your business wrote, but the payee hasn’t cashed yet. This can cause a temporary difference.

2. Deposits in Transit

You may have deposited money at the end of the month that didn’t appear in the bank statement until the next month.

3. Bank Fees

Banks often charge monthly service fees or overdraft fees. If you forget to record these, your books will be off.

4. Errors

Maybe you typed $540 instead of $450. These mistakes are easy to make and important to fix.

5. Fraud or Theft

If someone makes unauthorized withdrawals or writes a bad check, you might spot it during a reconciliation.

How Often Should You Reconcile?

Most businesses reconcile their bank statements monthly, usually after the bank sends its monthly report. However, businesses with high volumes of transactions might do it weekly or even daily.

If you’re using accounting software, you may get alerts about unmatched transactions, which makes daily reconciliation easier.

Tools That Can Help

Doing a bank reconciliation manually is possible, but software can make it easier and faster. Here are some tools that help with the process:

• QuickBooks: Automatically imports bank transactions and flags mismatches.
• Xero: Offers smart reconciliation tools and easy reporting.
• Zoho Books: Good for small businesses with a tight budget.
• FreshBooks: Simple and user-friendly for freelancers and service-based businesses.
• Wave: A free option that includes basic reconciliation tools.

These tools help automate much of the comparison process and reduce the chance of human error.

Best Practices for Bank Reconciliation

To make your bank reconciliations smooth and effective, follow these best practices:

1. Reconcile Regularly

Don’t wait months between reconciliations. Regular reviews keep your books clean and errors easier to fix.

2. Keep Your Records Up to Date

Record transactions as soon as they happen. The more accurate your data, the easier the reconciliation.

3. Use a Checklist

Create a simple checklist for each reconciliation. This helps ensure you don’t skip any steps.

4. Separate Duties

In larger businesses, don’t let the same person handle money and do the reconciliations. It’s a strong internal control.

5. Review with Your Accountant

Even if you do your own bookkeeping, review your reconciliations with a professional accountant now and then.

Why Hire a Professional?

If you’re overwhelmed by numbers or just short on time, hiring a bookkeeper or CPA can help. A professional can handle monthly reconciliations, identify problems early, and make sure your financials are audit-ready.

Working with experts like Global FPO gives you peace of mind. We offer expert bookkeeping and bank reconciliation services that help businesses avoid costly mistakes, stay compliant, and make better decisions.

Keep Your Finances Clean with Regular Reconciliations

Bank reconciliations might not be the most exciting part of running a business, but they’re one of the most important. They help you detect errors, prevent fraud, and understand your real cash flow. Whether you use spreadsheets or advanced software, the key is consistency. Make it a habit to reconcile your bank accounts regularly, monthly at a minimum.

If you’re unsure where to start or need help with your bookkeeping, reach out to Global FPO. Our team can take care of your reconciliations, so you can focus on what you do best, growing your business. Accuracy matters, and with the right support, you’ll never be in the dark about your finances again.

Frequently Asked Questions (FAQs)

1. What is the main purpose of bank reconciliation?

The main purpose of bank reconciliation is to ensure that a business’s internal financial records match the transactions reported by the bank.

2. How often should I do a bank reconciliation?

Most businesses reconcile their bank accounts monthly, but businesses with high transaction volumes may do it weekly or even daily to maintain financial accuracy.

3. What happens if my bank reconciliation doesn’t balance?

If your reconciliation doesn’t balance, review both your bank statement and your internal records carefully.

4. Can I do bank reconciliation without accounting software?

Yes, you can reconcile manually using spreadsheets or paper records. However, using accounting software like QuickBooks, Xero, or FreshBooks can speed up the process and reduce errors.

5. Why should I hire a professional for bank reconciliations?

A professional bookkeeper or accountant can ensure accuracy, detect fraud, keep your books audit-ready, and save you time.