What is reconciling your Bank Statement

Author: Neil Conway

A Crash Course in Bank Reconciliations

The most overlooked concept in the process of teaching someone accounting has to be bank reconciliations.  This is touched on briefly in high school accounting courses.  College courses ignore them almost completely.  Yet, they represent one of the most crucial aspects of maintaining accurate financial record keeping.

So, if you were assigned the task “reconcile bank statement” and have not done a business reconciliation in the past, it is typically an unpleasant introduction.  That may be why you are here: to find out how to proceed with this difficult task.

The good news is that the concept of reconciling the bank statement is straightforward and nearly every computer program written to manage bank reconciliations or manual process created to do reconciliations relies on the same principles in performing one.  So, if you are at the beginning stages of learning the process, this crash course will provide you with the important concepts that you need to know for any bank reconciliation.

The Concept: Reconcile bank statement

Let’s mention the overall concept of a bank reconciliation process.  What is reconciling your bank statement? A bank reconciliation nearly always means that you are attempting to find similarities and differences between a bank account and a cash account listed in an accounting system.  You are in essence looking at two lists: a list of transaction on a bank statement and a list of transactions in an accounting system and comparing them.  The end result is creating a document that tells the reader what is different between the two.

So, what is the best way to achieve that document we call a bank reconciliation?  The following are three basic steps that nearly always must be completed to successfully perform a bank reconciliation:

Step 1 – Gather Information

As a consultant, I often see people try to begin a bank reconciliation without all of the information needed.  They get the task from their boss of “reconcile the bank statement”.  Then they just dive into the task.  Picture someone trying to row a boat with only one oar.  You are not saving any time by skipping the step of gathering all of the materials you need.  Your process can quickly snowball.  To avoid a mountain of bank reconciliation problems, here is what is needed in a bank reconciliation process:

  1. Last month’s (or period’s) bank reconciliation.  – This is nearly a must.  If a bank reconciliation was not created in the prior month, it is nearly certain you need to keep going back several months until you find an accurate completed bank reconciliation and work forward from there.
  2. A current bank statement.  You probably know this one.
  3. A current general ledger of the cash account you are trying to reconcile from your accounting system.  This goes by many names.  So, don’t worry if the name general ledger is not appearing in your accounting system.  You may see the name “cash detail”, “account detail”, “detailed trial balance”, “check register”, etc.  Anything that shows the beginning balance, ending balance, and the transactions that make up that cash balance.  Keep searching until you find a report that gives you those three elements.

Step 2 – Validate the prior month bank reconciliation

This step may look odd or superfluous.  What does it mean to validate a prior month bank reconciliation?  Either you have one or you do not.  Right?  Well, not exactly.  A prior bank reconciliation is only worth the paper it is printed on if the report has an ending accounting system balance that ties to the beginning balance of the current month.  You simply cannot move forward until you verify this.  Otherwise, and please read this carefully, you will NEVER balance your reconciliation in the current month.

The prior bank reconciliation has the all important list of differences between last month’s bank statement balance and last month’s cash balance from your accounting system.  It is an essential part of the current bank reconciliation because you have to use it as a starting point.

Call it what you wish: bank reconciliation in tally in prior month, prior month validation, beginning balance verification.  It all means the same thing:  last month’s bank reconciliation must be valid before moving on to the current month.

The validation is quick if the prior bank reconciliation is valid:  You MUST be sure last month’s ending balance shown on the prior bank reconciliation document MATCHES the current beginning balance of your cash account in your accounting system.  This is the most overlooked step and the one most likely to prevent you from succeeding at your bank reconciliation if not done properly.

A dedicated computer program typically walks you through this step if the concept is less than appealing.

Step 3 – Compare (Reconciliation of bank statement)

Once you have gathered all of the information and made sure your prior bank reconciliation is validated, it is time to do the actual comparison.  Nearly all processes use what I call the “cross out method” at this point.  When you find two transactions that match, you use a pen or pencil and mark through them to indicate the match.

You may have some matches that require two or three transactions from a bank statement matching one transaction on the accounting system.  Various combinations can exist.  The main requirement is that any match you find must be equal on both sides.  In other words, you find a check on the bank statement for say $103.82.  You must also find that exact same amount on the book side (accounting system side) in order to cross them out.

Remember that you can cross out items from the prior month list.  If for instance you have a check showing up on your prior month bank reconciliation and it matches a check on your current month bank reconciliation, you should cross both out.

After you have finished crossing out items that match, anything left over is your list of transactions known as outstanding items.  This includes any items still left over from your prior bank reconciliation. In theory, you should be able to total all of those uncrossed out items and it will represent the difference between your bank balance and your accounting system balance.  That’s it.

This step of matching items is most closely associated with the concept of “reconciliation of bank statement”.  Your quest of reconciling the bank statement is more or less completed in this step.  You will have been matching transactions between the accounting system and the bank statement at this point.  You will find out what transactions from the bank statement have not been recorded along with what items in the accounting system have not cleared the bank.

One more word of advice…

Now, one more word of advice.  You can do this manually as I’ve shown here.  However, a computer program will make sure you follow all of these steps and greatly improve your chance of success in a bank reconciliation process.  Not all reconciliation programs are created equal. I usually avoid the ones that are “included” in accounting systems.  Excel is a popular choice but does not guide you through these steps and is nearly as slow as using pencil and paper.

The program that that caters to seasoned accountants but has a strong help menu and step-by-step process for beginners is called clearrec: www.clearrec.com.  The program has a free basic version that does not include bells and whistles such as automatically matching transactions.  However, it has no theoretical limitations in the size of the bank reconciliation.  At the time this article was written, you can download the basic version and receive a six month license for the basic version.

If you have had to learn from the internet “what is reconciling your bank statement”, hopefully this provided you some insight.  A bank reconciliation in tally is just a fancy phrase for “comparison between transactions in your bank statement and accounting system”.  The reality is that the process can be simple and straight forward for some reconciliations and a nightmare jigsaw puzzle for other reconciliations that devolve into a quagmire of bank reconciliation problems.

A dedicated computer program can speed up a simple reconciliation.  Alternately, it can keep your process and thoughts organized in a problematic reconciliation.  So, if your boss, client, coworker tasks you with “reconcile the bank statement”, consider heavily the idea of a dedicated computer program as the best long-term solution.

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