How to Reconcile your Bank Statements - And why it's Important

Reconciling bank statements is a critical process for any business to ensure financial accuracy and identify potential issues early. By regularly comparing internal financial records against bank statements, companies can catch discrepancies, errors, or fraudulent transactions before they become major problems.

For startups and small businesses, bank reconciliation is especially important since every dollar counts. Taking the time each month to thoroughly reconcile all business bank accounts provides owners with greater cash flow visibility, confidence in financial reporting, and peace of mind that the numbers add up.

When Should You Reconcile Bank Statements?

Experts universally recommend reconciling bank statements at least monthly as best practice. The beginning or end of the month when bank statements are issued works well for most startups and small companies.

However, any business with high transaction volume or multiple bank accounts should consider reconciling more frequently—weekly or even daily. The sooner discrepancies get identified, the easier they typically are to resolve. Frequent reconciliations also deter fraud by employees or hackers and prevent small mistakes from piling up.

For many startups and small businesses, the monthly reconciliation process kicks off closing the books and preparing financial statements. So proper bank reconciliation lays the foundation for understanding month-to-month financial performance.

Step-by-Step Guide to Reconciling Bank Statements

While bank reconciliation can feel tedious, following a methodical process makes it more manageable. Here are eight key steps:

1. Gather Bank Statements

Log in to online banking and access electronic statements for the period. Print out the statements to enable notating transactions. Having past statements on hand helps resolve discrepancies too.

2. Aggregate Business Transaction Records

Collect documentation with transaction details from accounting software, spreadsheets, or other systems used to track financials. A centralized accounting system makes this easier by storing everything in one place.

3. Compare Deposits

Match amounts and dates of deposits on the bank statement to deposit records. Note any deposits on the bank statement not showing in the accounting records since they require research.

4. Compare Withdrawals & Payments

Do the same comparison of withdrawals and payments like checks, transfers, or fees on both statements. Note any without a matching transaction in accounting records.

5. Account for Timing Differences

Some differences arise between bank and accounting records simply due to timing delays in clearing or errors catching up with the bank. Common examples include:

• Deposits in Transit: Bank has not yet processed deposits recorded in accounting system
• Outstanding Checks: Checks issued but not yet cleared the bank to withdraw funds
• Electronic Payments: Online payments with a processing delay

6. Adjust Beginning & Ending Balances

Update the beginning and ending balances to account for transactions noted in the previous steps that had not yet cleared on the bank statement. Adjust balances should now match monthly statements.

7. Research True Discrepancies

For remaining unresolved differences, dig into these transactions to determine where the discrepancy exists and which record requires correction. Contact the bank as needed if any ambiguity around a particular transaction.

8. Record Adjusting Journal Entries

To finalize reconciliation, record adjusting journal entries in the accounting system to address discrepancies identified in step 7. For example, add missing interest income or record fraudulent charges.

Common Bank Reconciliation Errors

Several common errors routinely cause discrepancies between bank statements and internal accounting records:

• Transaction amount entered incorrectly
• Duplicate transaction recorded
• Time period lag in recording transactions
• Unrecorded transactions like checks or fees
• Errors in opening account balance

While unintentional mistakes happen, it's essential to investigate thoroughly for potential fraud with bank reconciliation discrepancies. Also, avoid forcing a reconciliation by hiding legitimate differences or making unsupported adjustments. Doing so undermines having reliable financial reporting.

Tips for Streamlining Reconciliations

Performing thorough bank reconciliations every month takes effort but doesn’t have to be painfully tedious. Here are five tips for making it less dreadful:

• Reconcile more frequently in smaller chunks to prevent big monthly reconciliations.
• Use accounting software that allows transaction matching and auto-reconciliation.
• Standardize transaction coding to enable grouping by type and quickly spotting differences.
• Create reconciliation checklists and follow set procedures each month.
• Document any outstanding discrepancies that carry over to the next reconciliation.

Benefits of Automating the Bank Reconciliation Process

Major accounting software products like QuickBooks Online, Puzzle and Xero have robust bank reconciliation automation capabilities. Rather than totally manual entry, transactions download directly from banks into the accounting system.

Automated matching allows reconciling hundreds of transactions with a click to identify exceptions. And AI-powered solutions can auto-code transactions, create adjustment journal entries, and handle other reconciliation steps.

Benefits of bank reconciliation automation include:

• Saves hours of tedious manual work each month
• Minimizes data entry errors
• Identifies discrepancies more quickly
• Provides audit trail with detailed reporting
• Increases confidence in cash flow visibility
• Allows focus on investigating issues not data entry
• Scales easily as transaction volume grows

For most startups and small businesses, automation pays dividends by enabling growing the business instead of growing bank reconciliation work each month.

Conclusion

While bank reconciliation incites dread for some entrepreneurs, treating it instead as a vital periodic financial health checkup puts a more positive spin on the tedious task.

Rather than grumbling through the monthly chore, use bank reconciliation to your company’s advantage in making smart financial decisions and sleep better at night knowing the books balance. Leverage available software tools to save time and effort while increasing accuracy.

Implementing a consistent reconciliation process gives startups and small businesses greater confidence in cash flow visibility, financial reporting, and oversight to spot questionable transactions that deserve a closer look.