What is Bank Statement Reconciliation?

Bank statement reconciliation (also known as bank reconciliation) is a meticulous process of aligning a company's internal financial records with the corresponding bank statement entries to verify their consistency and accuracy. This procedure helps identify variances between the two datasets, enabling the detection of discrepancies, errors, or fraudulent activities, and ensures the integrity of financial reporting and account balances.

Why Is Bank Statement Reconciliation Important?

Bank statement reconciliation is a crucial financial control that ensures accurate cash flow management and supports sound decision-making. Here are four key reasons to perform regular reconciliation:

1. Accurate Cash Flow Tracking: Provides real-time insights into your cash position, helping prevent overextension and ensuring effective resource allocation.
2. Error Detection: Identifies discrepancies like duplicate payments or missing deposits, preventing issues from escalating.
3. Fraud Prevention: Acts as an early warning system for unauthorized transactions or suspicious account activities, safeguarding your assets.
4. Operational Efficiency: Helps maintain financial accuracy, supporting better business decisions and relationships.

How Does Bank Statement Reconciliation Work?

There are several different ways a company can approach bank reconciliation depending on their accounting software and internal processes; however, the basic sequence of the activity includes the following steps:

• Gather Documentation: Collect the bank statement and internal financial records, including the cash book and transaction logs.
• Compare Transactions: Review each transaction on the bank statement against the internal records to identify any discrepancies.
• Identify Differences: Highlight any missing deposits, outstanding checks, or unauthorized withdrawals.
• Adjust Records: Make necessary adjustments in the internal records to reflect accurate balances based on the reconciliation findings.
• Finalize Reconciliation Statement: Prepare a bank reconciliation statement summarizing the adjusted balances and any discrepancies found.

For Example:

Imagine a small business, Smith & Co., reviewing its June bank statement. According to its internal records, the ending balance should be $15,200, but the bank statement shows $14,850. To find the discrepancy, they perform a bank statement reconciliation.

Here’s what they uncover:

• Unrecorded Bank Fee – The bank deducted a $50 monthly service fee that wasn’t recorded in Smith & Co.’s books.
• Outstanding Check – A $500 check issued to a supplier on June 28 hasn't been cleared yet, so it appears in the company’s records but not on the bank statement.
• Deposits in Transit – A client paid $1500 on June 30, which was recorded in the books but has not yet been processed by the bank.
• Bank Error – The bank mistakenly withdrew $200, which needs to be corrected.

After making the necessary adjustments, the balances align, confirming accurate financial records.

That said, the manual process is both time-consuming and prone to errors. By automating bank statement reconciliation, businesses can easily cut down on mistakes and speed up the reconciliation process. 

Top companies like Hitachi have simplified their reconciliation process by managing over 36,000 bank statements in more than 50 different formats. By automating this task, they were able to save their accounting team 6,000 hours.

Three Takeaways

1. Bank statement reconciliation is essential for maintaining accurate financial records and detecting discrepancies.
2. Regular reconciliations help prevent fraud and ensure compliance with financial regulations.
3. A systematic approach to reconciliation enhances cash flow management and supports informed decision-making.

Frequently Asked Questions

1. How often should bank reconciliations be performed?

Ideally, bank reconciliations should be conducted monthly or quarterly, depending on the volume of transactions.

2. What common issues are identified during bank reconciliations?

Common issues include outstanding checks, deposits in transit, bank fees not recorded in internal accounts, and data entry errors.

3. What tools can assist with bank reconciliation?

Platforms like Docsumo take the hassle out of bank reconciliation. It extracts, validates, and organizes bank statement data automatically. You don’t have to match transactions manually or hunt for discrepancies. The system highlights mismatches instantly, saving time and reducing errors. It easily connects with your accounting software, and bank feeds for smooth data transfers.

4. What are deposits in transit?

Deposits in transit are funds that a company has recorded in its cash account but have not yet been reflected in the bank statement. These deposits are in the process of being cleared or processed by the bank and will appear on the bank statement once the bank has completed the transaction.