Why Bank Reconciliations are one of the most important functions in Bookkeeping

Doing a Bank Reconciliation is one of the final things you do when you are bookkeeping. It is the main way to check that you have entered everything and it is all correct. In today’s blog we will look at the process of doing a Bank Reconciliation.

What is a Bank Reconciliation

A Bank Reconciliation is the process that enables us to check the accuracy of your businesses accounting records for your cash/bank account against your banks actual statement for the same time period. It helps you identify the difference between the two and it ensures that the businesses records are correct with the bank records.

It is good practice to carry out reconciliations at reasonably frequent intervals so that you know exactly what your banks balance is at a given time. At a minimum, a reconciliation should be carried out on a monthly basis. Some larger companies conduct daily reconciliations, this enables them to find and correct problems immediately

Differences will occur for several reasons:

  • A cheque you have issued hasn’t been presented to the bank at the time the statement was issued
  • Deposits made on the same day that the bank statement is issued may not appear on the statement.
  • A charge, or bank fee, charged by the bank has not yet been recorded in the businesses accounting program
  • An error has occurred in the recording of a transaction by the business or the bank
  • Payments made directly by the bank on the businesses behalf, for example payments for a car lease, may not have been recorded in the businesses accounting program
  • Deposits made directly by the bank, for example interest received, which the business may not know about until they receive the statement
  • A Cheque that you have deposited my be dishonoured due to insufficient fund in the payees bank account

Bank Reconciliation Procedure

This reconciliation procedure assumes that you are creating the reconciliation in an accounting software package. This makes the reconciliation process easier. Some recent accountant packages that have come available have eliminated the need for a bank reconciliation, but I would suggest that, if your accounting program does not offer this, then you need to at least manually reconcile your accounting programs transactions to your physical bank statement.

  1. Go to the section of your accounting program where you process the reconciliations. Here there will be a list of all uncleared cheques and deposits.
  2. Check the opening balance on the accounting program compared to the actual bank statement, these should match.
  3. Enter the ending balance on the bank statement. The aim of a reconciliation is to get the ending balance of the bank statement to match the ending balance of the accounting program.
  4. You now need to work through the bank statement from the bank and the list of transactions matching them and ticking them off. This way you can find if there are any transactions you have left out or entered incorrectly.
  5. Tick off all the cheques that are listed on the ban statement as having cleared the bank.
  6. Tick of all deposits that are listed on the bank statements as having cleared the bank
  7. Once you have ticked off everything that you possibly can if the accounting programs ending balance still does not equal the ending balance of the bank statement then you will need to review the reconciliation for additional items that need to be entered into your accounting program.
  8. Once you have identified what additional items need to be entered, leave the reconciliation module of your program and go and enter any additional items.
  9. Go back into the reconciliation module of the accounting program and follow the steps above again, keep repeating until both balances match

Problems that can occur

There are several problems that continually arise as part of the bank reconciliation. These are:

  • Uncleared Cheques that continue to not be presented. There always seems to be a certain amount of cheques that either are not presented for a really long time or are never presented for payment. These need to be kept in the uncleared cheques listing in your accounting program for a while just in case they eventually get presented. But eventually (I usually do this at the end of financial year) you should contact the payee to see if they ever received the cheque, then void that cheque, issue another one and cancel the cheque with the bank.
  • Cheques clear the bank after you have voided them. Sometimes you may void a cheque and not worry about cancelling it with the bank. When you do this you risk that it will eventually get presented at the bank and cleared. When this happens, you need to re-enter the cheque as you would any other cheque (debiting the relevant expense and crediting the bank account). If you have not yet issued a replacement cheque then all is ok. If you have issued a replacement cheque and the payee hasn’t banked it yet, get them to return it and then cancel it with the bank and void it in your system. If the payee has presented both cheques you will need to get them to pay one back to you.
  • Deposited Cheques are returned. Sometimes a bank will refuse to deposit a cheque, usually this is the case if the payee doesn’t have sufficient funds in their bank account. When a cheque is dishonoured the bank will withdraw the amount of that cheque from your bank account and charge you a processing fee. You will need to reverse the payment of that cheque t o you and enter the bank fee. Then you will need to contact the payee and arrange for another form of payment.

Bank Reconciliation Report

When you have finished the bank reconciliation and you tell your accounting program that you accept that the bank statement balance matches the accounting program balance, the program usually allows you to print a report. This report shows the bank and book balances, the identified differences between the two (mostly uncleared cheques) and any other unreconciled items.

Print this report and attach it to the relevant bank statement and file for end of year processing.

bank rec

Once you have finished your Bank Reconciliation you just need to check your Profit and Loss Statement and Balance Sheet as previously discussed. Then you check your Tax Codes to make sure they are correct and your bookkeeping is ready for BAS time or TAX time.

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