To reconcile a business bank account, an accountant or business owner checks the transactions recorded in a company’s internal books as well as those shown on a statement from their bank or other financial institution. They then adjust for uncashed checks and interest earned, flagging any missing or unfamiliar transactions for further review.
Reconciling a bank account at least monthly is extremely important for business owners to ensure that the transactions they’ve accounted for are accurate and that they have as much money in their account as they think they do. This is also the best way to catch any missed or potentially fraudulent transactions so they can be corrected as soon as possible.
What is bank reconciliation?
Reconciling a business bank account is the process of checking transactions recorded in internal accounting records against those reflected on a statement provided by a bank or other financial institution and noting which transactions are or aren’t reflected in both records.
By following this process, you can ensure that you have an accurate accounting of all your business’s transactions and that none have been entered improperly or lost in transit. You can also detect fraud early so you can alert your bank and resolve discrepancies.
Why is reconciling your bank account important?
Regularly reconciling your business bank account is the fastest way to detect any fraudulent activity – by flagging for review any transactions that appear on your statement of account activity that aren’t included in your internal accounting.
Reconciliation also helps you make sure your bank balance matches your company’s internal records. You can identify any payments that may have been lost or gone to the wrong payee and make sure that you don’t accidentally overdraw your account.
If you don’t regularly reconcile your business bank account with your internal records, you could easily miss fraudulent transactions in your account. You might also lose payments to vendors, have bills sent to collections (which can hurt your credit), or accidentally overdraw your account and get hit with big fees from your financial institution for writing bad checks. You could even miss out on tax deductions and end up paying more in taxes than you owe.
How to reconcile a bank account
To reconcile your business’s bank account, you need to review your account activity statements from your financial institution(s). You then need to compare the transactions reflected on your statements to your company’s internal accounting of debits and credits. You may need to make adjustments for payments that haven’t cleared yet (such as uncashed checks) and interest earned on your account(s). Flag any transactions you don’t recognize for further review.
Here are the steps in greater detail.
1. Review your account statement.
The first thing to do when reconciling your accounts is to gather account statements for the periods and accounts you’re reconciling. Check each of the deposits, withdrawals, and payments (canceled checks) listed on each statement, taking note of any transactions you don’t recognize. Also note your ending balance so that you can check it against your own accounting later.
Bottom line: Reviewing account statements is a business owner’s first chance to spot potentially fraudulent transactions and flag them for further review.
2. Compare statements to internal accounting records.
Once you’ve reviewed the account activity recorded by your bank during the reconciliation period, compare the transactions listed on your statements to your own records. Make sure all transactions appear both in your records and on your bank statements in the same amounts. Take special note of any that don’t match or that you don’t recognize. More likely than not, you’ll have a few transactions (both debits and credits) that don’t match up and require some adjustments.
Tip: Modern accounting software makes the comparison process almost entirely automatic by linking your internal records to your online bank records. This makes it easy to spot any mistakes in your accounting of transactions.
3. Adjust for uncashed checks.
If you regularly send payments by check for your business, chances are you’ve sent a few checks that haven’t been cashed yet, so they won’t be reflected in your bank records. This means you may have recorded quite a few transactions that aren’t included in your bank statement or reflected in your final balance.
In other words, your bank statement may show “available” funds that could disappear any day when payees cash your checks. For purposes of account reconciliation, you’ll need to adjust your records by adding back the value of any uncashed checks or subtracting the value of any deposits that haven’t cleared yet.
Tip: If you have payments that have been outstanding for more than 30 days, you may want to contact those payees to confirm their contact details and that they actually received your payment. Otherwise, they may send your payment to collections.
4. Record interest income and other credits.
Before moving on, you may also need to adjust for interest income and other debits or credits that appear in your bank statement but not in your internal records. However, you should limit your adjustments to transactions that you can confirm easily with your bank. These are some typical adjustments:
- Interest earned on your account
- Bank fees that you may not get alerts about until the statement comes (such as paper statement fees)
- Overdraft or late-payment fees
- Wire-transfer fees
- Bank fee reversals
If you notice any of these types of transactions on your statement, you should confirm them with your bank and adjust as necessary by entering transactions in your records to match your statement.
5. Review any other discrepancies.
Once you’ve adjusted for uncashed checks and easily confirmable debits or credits on your bank statement, check any other transactions that don’t match up. In some cases, transactions may appear on your bank statement that you simply forgot to record. Other times, your bank may have made a mistake by crediting your account instead of another customer’s. In a worst-case scenario, your account may have been impacted by fraud.
To reconcile unusual transactions, you may need to check your prior records to see if any transactions on your statement are from payments you issued before the current reconciliation period. You may also need to check other accounting records – such as vendor invoices – to see if you simply forgot to enter a transaction in your bookkeeping software. In this case, you’ll need to enter those transactions now to correct your internal records. (You can enter the transaction in the current month, rather than trying to recall when payment was actually issued.)
If, after reviewing your records, you can find no indication that you simply forgot to enter the transaction, you should contact your bank to get more details about the transaction, including copies of canceled checks or bank transfer details. You can use these details to try to confirm whether it was a payment you actually intended to send and just failed to note. If you still don’t recognize the payee or the specific transaction, contact your bank’s fraud department right away.
FYI: Some banks will reverse fraudulent transactions if they’re caught early enough, which is why it’s important to reconcile your accounts early and often.
6. Reconcile your checking account with other accounts (optional).
Not all companies use double-entry accounting, even though it’s a common feature of accounting software. If you use this type of accounting for your business, when reconciling your bank account, you should use this as an opportunity to reconcile your other accounts as well.
This process is a bit more complicated, but once you reconcile all of your internal transaction records, it basically involves ensuring each individual transaction is broken down properly in your books. Each transaction should be reflected at least twice in your internal records – once in a cash account and once as a credit or debit to a liability or equity income.
Tip: By using dual-entry accounting and reconciling your transactions across all your accounts, you can see updated amounts of outstanding debts as well as the net value of your business at the end of each accounting period.
How often should you reconcile bank accounts?
Most business owners reconcile their bank accounts at least monthly, which is the general recommendation. However, with modern accounting software, you can keep your bank accounts under constant surveillance and know at any given time exactly which transactions have cleared and which are outstanding.
The software can also send you instant notifications if a transaction clears in your account that you haven’t entered in your records, so you can take immediate steps to resolve any accounting mistakes. With these capabilities, there’s no reason not to make reconciliation a near-constant bookkeeping practice for your business. Use the monthly account reconciliation as a time to review your company’s transactions for ways to save money or improve your operations.
What happens if bank reconciliation doesn’t balance?
If, in the process of reconciling your business bank account, you find that the balance on your account statement doesn’t match the balance in your records, it could be for any number of reasons. Most often, it’s a result of bank fees that the bank doesn’t notify you about until your statement comes, or it’s an internal mistake – transactions that were not entered or were entered incorrectly. What you should do in response depends on the nature of the error and the risk to your business.
These are some of the most common factors that throw off a reconciliation and how to deal with them:
- Uncashed checks: You may need to remind payees to cash your checks.
- Bad payee info: Double-check that you have the payee’s correct address and other accurate details.
- Missed deposit: Confirm the deposit with your bank.
- Incorrectly recorded transaction: Check your records (copies of invoices, canceled checks, etc.) to verify the transaction details.
- Fraudulent transactions: Get transaction details from your bank or alert its fraud department.
The bottom line on business account reconciliation
To recap, reconciliation is the process of checking your business’s accounting records against the balance and history of transactions reflected on statements from your bank or other financial institution. To reconcile your accounts as a business owner, you need to check your internal records against those from your bank to clear transactions and to flag and adjust any transactions that don’t match your company’s records – even after some additional review.
To protect the integrity of your business’s finances, it’s important to reconcile your accounts at least monthly. This allows you to ensure your transactions are being entered correctly and processed in a timely fashion, and to see if any of your outgoing payments haven’t processed yet so you’ll know how much money in your account is really available to you. It also helps you detect mistakes in your accounting and fraudulent transactions so you can take corrective action as soon as possible.