A Step-by-Step Guide to Bank Reconciliation for Balancing Books

An image of a local Burlington bookkeeper doing bank reconciliation for his client.

All small business owners will agree that bank reconciliation is one of the most boring tasks of running a business. Bank reconciliation is cross-checking your business’s books of accounts and documents against the bank statements of the business account to ensure all transactions are duly accounted for.

It’s a tedious, time-consuming job and requires attention and caution.

Why Is Bank Reconciliation Important?

Nevertheless, bank reconciliation must be done regularly for several reasons. It helps you:

  1. Identify any errors or miscalculations in accounting.
  2. Check if you have missed recording any transactions.
  3. Streamline and properly date your financial records with the bank’s records. For instance, the date of the transaction and the date and amount cleared by the bank could be different. You can adjust your statements accordingly to avoid confusion.
  4. Update your accounts with bank-specific charges such as interest or any bank fees only reflected in the bank statement.
  5. Identify, prevent, or uncover any suspicious transaction or theft.

And the key to reconciling it right is to do it systematically, one step at a time.

Getting Started with Bank Reconciliation

Here’s a step-by-step guide to bank reconciliation to assist you:

Step 1: Obtaining bank records

The first step is getting detailed statements of your small business’s bank account(s). Online banking facilities have made this much quicker and easier, as the bank can easily send the statement to your registered email with a single click.

Step 2: Organizing your own records

If you use accounting software or a digital spreadsheet, you are sorted. But if you still prefer the traditional pen-and-paper method of keeping accounts, you must gather all the relevant files, bills, and other papers. It would be a good idea to arrange them chronologically before you begin reconciliation; this will save time rather than having to hunt through all over again as you go through the bank’s list of transactions arranged date-wise.

Step 3: Identifying the starting point

If you are doing this for the first time, the best place to start would be at the beginning of the financial year. Any older transactions can be adjusted later, but the first day of the current financial year is a good place to begin. For those owners who do this process every year, start from the point you left off at the last time.

Step 4: Check all the matching transactions

Now comes the part that needs the most attention and patience. Keep your financial and bank records side-by-side and review each transaction diligently. All the deposits and withdrawals in the bank statement must match the income and expenses in your books of accounts. If you’re doing it on paper, you could use a pencil and place a tick against each entry as you match them. You could use a specific colour on a spreadsheet to highlight all the matching transactions. Don’t be in a hurry as you do this; skipping an entry could mean redoing it again, adding to your frustration.

Step 5: Double-check any transactions that don’t match

Despite the best technology or your most attentive bookkeeping skills, there can be slip-ups in recording accounts. Sometimes, the sheer volume of transactions can lead to such errors. Miscalculations also occur when dealing in foreign currency, so watch for those. Sometimes, you might write just the amount but not the payment details. Sometimes, the bank statement could also have an error. It could also be a case of a payment not going through or a deposit still in transit. If you find any mismatches or missing entries, take a moment to double-check. If the entry is indeed missing, make a note of it. Find out the reason for the anomaly and adjust and update your own records and/or the bank’s records accordingly.

Step 6: Adjust and Balance

Once you’ve matched all transactions, it’s time to tally the balances of both records. Remember, before you do this, make sure your cash balances are well-accounted for and are the same as in the bank records. Make adjustments to include your business’s cash account in the final tally. Once the totals of the two records match, your bank reconciliation process is complete!

And if they don’t, you’ll have to redo the process until you find out what’s wrong. That’s why it’s advisable to do this task regularly. Large corporations must do it daily. As a small business owner, you can determine a good bank reconciliation schedule based on the volume of transactions your business attracts. But a weekly or at least monthly review will save time at the end of the year when the tax season begins. Also, if there is any suspicious activity, you can catch on to it immediately and perhaps prevent a bigger financial fraud.

And over and above all this, regularly doing this exercise keeps you updated on how your business is really going. Think of it as a business health check-up. Going through the numbers at a glance gives you an overall picture of your business’s health and can be useful when talking to investors or devising processes and strategies.

Contact Edelkoort Smethurst CPAs LLP in Burlington for Your Bookkeeping Needs

Talk to a professional bookkeeper to outsource your bank reconciliation and other record-keeping needs. They can prepare and file records as per industry standards, saving you time and effort in formatting in case of an inquiry. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best bookkeeping expertise, contact us online by telephone at 905-517-2297.