How to accurately reconcile bank statements: 2 tips for reconciling ledgers and statements.

Reconciling bank accounts is a crucial task, yet it's often overlooked by many individuals and small businesses. Even a small discrepancy between your accounting records and bank statements can lead to financial errors, losses, or fraud without your knowledge. This article will guide you through a simple, easy-to-understand, and practical way to reconcile bank accounts , helping you quickly check cash flow, detect unusual transactions, and manage your finances more effectively, even without a deep accounting background.

Tip 1: How to accurately adjust your bank statement balance

Step 1: How to perform basic and accurate bank reconciliation

Check your balance on your bank statement.
As soon as your bank releases your end-of-month statement, you should access and check it as soon as possible, especially if you use online banking. This helps detect discrepancies promptly before the figures overlap and carry over to the next month.

• Record the ending balance on your bank statement.

• The primary objective is to compare bank balances with internal cash balances.

• Check each transaction to see if it appears on both your bank statement and in your cash book .

Understanding the correct concepts of debit and credit entries on a statement.
In bank statements, the terminology used may differ from that in accounting, and misunderstanding it can easily lead to incorrect comparisons.

• Debit entries on a statement are amounts deducted from an account , such as withdrawals, transfers, and bank fees.

• Credits on a statement are amounts added to an account , such as money transferred by customers or deposits.

• The concepts of debit and credit in accounting should not be applied mechanically to bank statements.

Identify discrepancies when reconciling bank accounts.
If a transaction only appears on one side, that's a sign that needs careful investigation.

• The transaction is only shown on the statement but not yet in the books.

• The transaction was recorded but the bank did not process it in a timely manner.

• These amounts are called bank reconciliation adjustments.

• Your task is to find the cause and make adjustments so that both sides match.

Apply the simple bank reconciliation formula.
Bank reconciliation can be understood as a calculation to check the logic of cash flow.

• Cash balance as recorded in the books.

• Add or subtract the differences that need adjustment.

• The result must equal the balance on the bank statement.
  When these two numbers match, the bank reconciliation is considered complete.

Clearly distinguish between book balances and bank balances.
Using the correct terms helps you avoid confusion when working with accountants or auditors.

• The book balance is the amount recorded in the internal system.

• The bank balance is the amount shown on the bank statement.

• The difference between these two balances always comes from adjustments , not random errors.

Step 2: Adjust your bank balance with pending deposits.

Plus any deposits that have not yet been recorded by the bank.
During the bank reconciliation process, you need to check for funds that have been deposited but haven't yet appeared on your statement. These are often referred to as pending deposits .

• There is a delay between the time you deposit money and the time the bank adds the balance.

• Depositing money at ATMs or teller counters is usually processed faster.

• Sending money by post or through indirect means can take several days.

Record the money in the books as soon as it is received.
From an internal management perspective, the deposit must be recorded immediately upon deposit, without waiting for the bank to update the information.

• The cash book or accounting ledger is immediately increased by the amount deposited.

• The bank's failure to record the transaction creates a discrepancy when reconciling bank accounts.

• This discrepancy is not an error, but a normal occurrence.

Adjust the balance on the bank statement upwards during reconciliation.
To accurately reflect your actual cash balance, you need to adjust your bank balance when reconciling it.

• Add the unrecorded deposit amount to the bank statement balance.

• The goal is to bring the bank balances back to reflect the actual cash flow.

• This is an important step in the process of accurately reconciling bank statements.

A practical and easy-to-understand example.
Using specific data allows you to quickly verify the comparison results.

• Balance on bank statement: 5,000

• On July 31st, you submitted an additional 1,500.

• The July statement does not show this amount.

• When reconciling, add 1,500 to the statement.

• Adjusted bank balance: 6,500

• The 1,500 is the adjustment amount when reconciling with the bank.

Step 3: Deduct the outstanding checks from the bank balance.

Identify paid checks and unpaid checks.
When reconciling bank statements, you need to clearly distinguish the status of each check to avoid discrepancies in the balance.

• A paid check is a check that has been acknowledged by the bank and the money has been deducted from the account.

• An unpaid check is a check that has been issued but not yet processed by the bank.

• This often happens when you write checks at the end of the month.

Reduce the bank balance for outstanding checks.
Checks that have not been recorded by the bank should be deducted from the bank balance during reconciliation.

• This is a mandatory step in the accurate bank reconciliation process.

• The goal is to accurately reflect the actual amount of money that is still available for use.

An easy-to-understand example of bank reconciliation.
Following these steps will help you check quickly and avoid mistakes.

• Initial bank balance: 5,000

• Total pending deposits: 1,500

• Adjusted bank balance: 6,500

• At the end of the month, there were 5 unpaid checks, totaling 3,000.

• Subtract 3,000 from the adjusted balance.

• Final bank balance: 3,500

Check outstanding checks from last month.
For a complete bank reconciliation, you shouldn't just look at the current month's statement.

• Review last month's statement to check for any outstanding checks.

• Confirm whether these checks have been processed by the bank this month.

• If the check remains unpaid, contact the recipient to find out the reason.

Handling unusually long pending checks
Checks that remain unclaimed for too long can pose potential financial risks.

• A check that remains unpaid for more than a month may have been lost.

• It is necessary to proactively contact the recipient to confirm the status.

• If necessary, consider canceling the check and reissuing it.

Step 4: Check and resolve errors on the bank's side.

Compare bank statements with internal records.
When reconciling bank statements for individuals or businesses, you need to carefully compare the bank statements with internal records. For businesses, cash figures are typically recorded in the general ledger .

• Compare each cash transaction in the ledger with the activity shown on the bank statement.

• Beware of transactions of unknown origin or that cannot be explained.

• If you detect any unusual transactions, contact your bank immediately for verification.

Identifying common bank processing errors.
Not all discrepancies are due to internal errors; banks can also make mistakes in recording transactions.

• A common mistake is reversing the order of the digits when recording the amount of money.

• For example: write 570 instead of 750

• The difference due to this error is usually a multiple of 9 , making it easy to identify.

• Once the bank error is correctly identified, contact them to request a correction.

Eliminate the difference after the bank adjusts it.
After the bank corrects the error, the discrepancy will be automatically processed during reconciliation.

• The bank balance is updated correctly.

• The bank reconciliation adjustment is eliminated.

• Ensure the balance matches the internal records.

Distinguishing between banking errors and fraud risks.
If it's not a processing error, the discrepancy could be due to fraud.

• Unusual transactions not made by you or your business.

• The check was stolen and money was withdrawn illegally.

• This is a common situation in small businesses.

Promptly address fraudulent transactions.
When fraudulent transactions are detected on a bank statement, immediate action is necessary.

• Contact the bank to report the unauthorized transaction.

• The bank will verify the information and issue a refund if there is sufficient evidence.

• After the money is refunded, the discrepancy from the bank reconciliation will be settled.

Tip 2: How to handle discrepancies in the accounting ledger balance.

Step 1: Confirm that all checks have been acknowledged by the bank.

Prepare all necessary reports and documents before conducting the verification.
When receiving a bank statement, you need the corresponding internal data for accurate verification.

• Businesses should print cash reports , lists of issued checks, and deposits for the month from their accounting software.

• Individuals should check their retained checkbooks and deposit slips .

• The goal is to have sufficient grounds to examine each transaction.

Review checks in chronological order by check number.
Checking in a sequential order helps avoid omissions or duplications.

• Review each check written in order of check number.

• Compare it with your bank statement to confirm that the check has been paid by the bank.

• If the check has appeared on the statement, record the paid status in the books.

• The markings can be made directly in the accounting software or on a manual tracking sheet.

Check last month's checks.
Bank reconciliation should not be limited to transactions from the current month.

• Review the checks issued last month.

• Check if they have been recorded in this month's statement.

• If payment has been made, update the status in your profile.

• If not, contact the recipient to verify the status.

Make a list of unpaid checks.
After completing the audit, you need to compile the checks that have not yet been recorded by the bank.

• Write down the check number.

• Specify the amount.

• Specify the recipient of the money.

• This list helps you keep track of your outstanding payment obligations.

Determine the total value of outstanding checks when reconciling with the bank.
The total amount of outstanding checks is important during the reconciliation process.

• This total represents the value of unpaid checks for the month.

• This is an adjustment made during bank reconciliation.

• This figure is used to deduct from the bank balance during reconciliation.

Step 2: Confirm that all deposits have been acknowledged by the bank.

Prepare a list of deposits for bank reconciliation.
Before you begin, you need to compile a complete list of all payments made during the month.

• Businesses should print a list of deposits for the month from their accounting software.

• Simultaneously review all saved payment receipts.

• For individuals, it is necessary to compare the deposit list in the checkbook and the deposit slip.

Compare your deposit with your bank statement.
When you receive your statement, focus on checking the amounts the bank has recorded.

• View the list of deposits that appeared on your bank statement this month.

• Compare each item with internal data to identify any discrepancies.

Review deposits in chronological order.
Daily checks help ensure no transactions are missed.

• Review all deposits in the checkbook or accounting report in chronological order of deposit date.

• Confirm each transaction that appears on the bank statement.

• If recorded, mark the "deposited" status in the tracking log.

Check pending deposits from last month.
The deposits made at the end of the previous period should not be ignored.

• Review the pending deposits from the end of last month.

• Check if they have been recorded by the bank in this month's statement.

• If recorded, update the status to avoid duplication when cross-referencing.

Create a list of unrecorded deposits.
After completing the review, it is necessary to compile a list of expenses that are not yet shown on the statement.

• Please specify the amount to be deposited.

• Specify the payment date.

• This list reflects pending deposits for the month.

Determine the total pending deposits when reconciling with the bank.
The total value of unrecorded deposits plays an important role in reconciliation.

• This total amount represents the pending deposits.

• This is an adjustment made during bank reconciliation.

• The figures are used to add to the bank balance during reconciliation.

Step 3: Adjust the cash book with bank fees and automated transactions.

Excluding bank service fees.
When reconciling with the bank, you need to fully update all fees that the bank has deducted but not yet recorded in the cash book.

• Monthly account service fee

• Overdraft fee

• Other processing fees charged by the bank.

• These amounts usually appear on bank statements but are not yet recorded in the cash book at the end of the month.

• These fees need to be deducted from the cash book so that the figures match.

Handling unrecorded fees
If the fee appears on the statement but is not yet recorded in the books, that is an amount that needs adjustment.

• Example: Statement showing service fee of 10

• This amount has not been recorded in the cash register.

• 10 needs to be deducted from the cash book.

• Before being recorded in the books, this amount is considered a difference when reconciling with the bank.

Add bank interest to the cash balance.
Interest accrued is usually only known when you receive your statement.

• The bank automatically adds interest to the account.

• You need to record an increase in the cash balance based on the interest earned.

• Before the update, this interest was also an adjustment made when reconciling bank accounts.

Excluding automatic payments
Many accounts have recurring payment settings for monthly bills.

• If you don't track your debit history, you might not know about a transaction until you check your statement.

• Check your statements for automatic deductions.

• Record and deduct these amounts from the cash ledger.

• A complete update will eliminate the discrepancy when reconciling.

Handling returned checks due to insufficient funds.
A returned check is a situation that requires immediate adjustment in the cash register.

• The statement shows that the check was returned due to insufficient funds (NSF).

• That money never actually went into the account.

• The full value of the check must be deducted from the cash book.

• If the bank charges an additional fee for processing a damaged check , this fee must also be deducted.

• In case of an overdraft, an additional fee for exceeding the balance must be recorded.

Step 4: Review and correct any record-keeping errors that occurred during the month.

Review for errors resulting from incorrect recording in the cash register.
During bank reconciliation, discrepancies often arise from internal record-keeping errors.

• Incorrect check amount or deposit amount recorded.

• Incorrect data entered when updating the cash register.

• These errors create discrepancies when reconciling bank accounts and need to be corrected immediately.

Identifying digit reversal errors during comparison
A very typical indicator for detecting recording errors is a regular discrepancy.

• If the remainder is a multiple of 9, such as 270 or 630

• It's highly likely you reversed the order of the digits when recording the transaction.

• For example, the actual check is 310 but it was mistakenly written as 130.

• This error is quite common and easily overlooked if not checked carefully.

Fix the error to eliminate the discrepancy.
Once the cause has been identified, adjustments should be made immediately in the cash register.

• Correct the amount to match the original document.

• Ensure the cash register accurately reflects actual transactions.

• After adjustment, the difference will be eliminated.

Double-check the final bank reconciliation formula.
This step helps confirm that the entire matching process has been completed correctly.

• Cash balance according to the ledger

• Add or subtract all differences when reconciling.

• The result must equal the balance on the bank statement.

• If there is a mismatch, each step needs to be reviewed until all discrepancies are identified.

References

1. http://www.accountingtools.com/questions-and-answers/
   what-is-the-purpose-of-a-bank-reconciliation.html
2. https://www.youtube.com/watch?v=aeOOZdLTX0s
3. http://accountingexplained.com/financial/
   cash-and-equiv/bank-reconciliation
4. http://docs.oracle.com/cd/E39583_01/fscm92pbr0/eng/fscm/fsbk/
   concept_UnderstandingBooktoBankReconciliation-9f258f.html
5. http://accountinginfocus.com/financial-accounting/
   cash-financial-accounting/cash-bank-reconciliations/
6. https://www.youtube.com/watch?v=aeOOZdLTX0s
7. https://www.youtube.com/watch?v=BoSZZCUP_iA
8. https://www.youtube.com/watch?v=9LfnlMz2Aic

Translated by: Lesley Collins Tran .