The basic purpose of a bank reconciliation is to protect your business from unauthorized transactions that may appear on your bank statement or that may also appear anywhere in your internal books of accounts. When you reconcile your bank statement, you should compare every transaction of your cash book and other accounting ledgers with a bank statement for a specified period. Bank reconciliation is all about matching your internal accounting ledgers with your bank statements and you need to make sure that the ending bank balance for a particular period perfectly matches your internal cash book. Monthly bank reconciliation helps you identify unusual transactions that could be caused by fraud or accounting errors. Therefore, bank reconciliation will help you deal with inefficiencies that require immediate action.

A regular review of your accounts can help you identify problems before they get out of control. It is commonly said, “Catch Fraud Before It's Too Late”. While doing a reconciliation, you need to consider the following points:

  1. If some of the cheques issued are duplicated or altered, it will result in more money leaving your checking account.
  2. Is there any cheque issued without authorization?
  3. Are there any unauthorized transfers out of your business account, or did anybody make unauthorized cash withdrawals?
  4. Does your business bank account have any missing deposits?

Prevent Administrative Problems

Reconciling your bank account also helps you identify internal administrative issues that need immediate attention. For example, you might need to re-evaluate how you handle cash flows and accounts receivable, or perhaps you need to change your record-keeping system and the accounting processes. If you manage your accounting and bookkeeping processes effectively, you can control many inefficiencies right in time. Following are some of the issues that you will confront while doing your periodic bank reconciliation:

  • Bounced cheques
  • Bank fees for insufficient funds
  • Missing transactions in the accounting system
  • Bank errors

For ideas on how to manage your bank accounts as your business grows, speak with the treasury management department at your bank or credit union.

You can also build protection into your bank accounts, and your bank can provide some helpful ideas. For example, many banks offer a solution called Positive Pay, which prevents your bank from approving payments out of your account unless you specifically provide instructions for approving individual payments in advance.

When is the Best Time to Reconcile?

It's a good idea to review your accounts at least once a month. For high volume business transactions, you may need to reconcile your banking transactions even more often. Some companies reconcile their bank accounts on a daily basis. It all depends on how strong the internal controls of your business are. In any case, you need to do bank reconciliation activity on a bi-weekly basis so that if there is an anomaly, it should be taken care of right away.

How Bank Reconciliation Works

To reconcile your accounts, compare your internal record to your monthly bank statement. Check each transaction individually and make sure that all transactions that have already been recorded in your internal ledgers are matched with your bank statement and if you highlight any difference, make a separate note and then investigate at the end of the whole reconciliation process. The process can be as formal or informal as you want, and some businesses create a bank reconciliation statement to document that they are reconciling accounts on a regular basis. If you don't complete the process every month, you can run it daily, quarterly, or for any other period of time you choose.

Few Examples of Bank Reconciliation

1234567 Ontario Limited is closing its books for the month ended March 30. The accountant must prepare a bank reconciliation based on the following issues:

  • The bank statement contains an ending bank balance of $120,600.
  • The bank statement contains a $150 charge for a new checkbook that the company ordered.
  • The bank statement contains a $150 service charge for operating the bank account.
  • The bank statement rejects a deposit of $500 due to non-sufficient funds and charges the company a $10 fee associated with this rejection.
  • The bank statement contains an interest income of $30.
  • 1234567 Ontario Limited issued $80,000 of cheques that have not yet been cleared by the bank (Un-credited cheques).
  • 1234567 Ontario Limited deposited $25,000 of cheques at month-end that were not deposited in time to appear on the bank statement (Un-presented cheques).

Bank Reconciliations are one of the tasks complete as part of GTA Accounting Bookkeeping Services. If you would like assistance with bank reconciliations or other bookkeeping services contact us for a free consultation.