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What You Need to Know About Bank Reconciliation Statements

A bank reconciliation statement rationalizes discrepancies to deliver a clearer, more accurate picture of a company's current financial standing. Learn more here

You've been the victim of fraud, and even more frustrating is that you should have caught it months ago. The evidence was sitting there on every balance sheet, waiting for you to notice the discrepancy. But your bank statements and balance sheets have always varied, and so many checks come in and go out around the end of the month that it's hard to keep track.

After several weeks — and several thousand dollars — you notice that your bank account is consistently and noticeably smaller than it should be. Apparently, one of your vendors has been "adjusting" the totals on their checks from you to get a little higher payment. And your assumption that everything was going smoothly left them plenty of opportunity to defraud you of a small fortune.

However, had you been using bank reconciliation statements, you would have caught on to their shenanigans much sooner.

What Is a Bank Reconciliation Statement?

If your business relies on accrual method accounting practices, the closing balances on your monthly bank statement and corporate balance sheet will rarely match up. This discrepancy can be caused by a variety of factors, such as:

  • Unprocessed deposits: checks that have been received and processed by your business, but the funds aren't yet available in your bank account
  • Outstanding checks: payments your business has issued to vendors who haven't yet deposited the funds
  • Account adjustments: typically a service fee or interest payment from your bank
  • Bounced checks: while your books will record the payment, your bank will have returned it to the sender without crediting your account

A bank reconciliation statement, in turn, rationalizes the discrepancies between these two figures to deliver a clearer, more accurate picture of a company's current financial standing. And the reconciliation can also help to detect any fraud or errors happening among the organization's transactions.

A Brief How-To BRS Guide

For your typical reconciliation process, there are four key stages:

  1. Get Prepared

Obviously, you'll need both your most recent bank statement and an accounting balance sheet covering the same time period. But if this is your first attempt, you'll want the corresponding documents from the previous month as well. Accurate, historical accounting information is critical for a smooth reconciliation process — which is why you'll ideally want to create these statements each month.

Of course, for businesses that primarily receive cash payments or that handle high volumes of transactions — such as a restaurant or busy retailers — you may want to complete these reconciliations more frequently.

At the same time, you'll want a reliable template or accounting software to help with documenting your findings. And if your internal accounting efforts aren't current, focus on bringing them up to date before attempting a reconciliation.

  1. Compare Records

If the closing balances on your bank statement and internal balance sheet are identical, congratulations, you're done. But more than likely, there will be a discrepancy. Review both statements, identifying any debits or credits that appear on only one document. At the same time, compare the listed amounts for all transactions that appear on both documents, noting any discrepancies.

Once you've identified all of the differences, determine their origin. Not only does this stage let you identify any hidden or overlooked fees, but it also allows you to identify transaction irregularities that may indicate fraud.

  1. Document Your Findings

At this stage, you'll actually create the bank reconciliation statement. While rationalizing the totals, begin with the balance shown on the bank statement, adding back any payments that you made that might still be in transit. Then deduct any checks that you've received that haven't hit your account, leaving you with an adjusted bank cash balance.

Next, using the closing total from your internal balance sheet, add any accrued interest and deduct any bank service fees — including penalties and Non-Sufficient Funds (NSF) checks. This process will give you an adjusted company cash balance.

  1. Repeat as Needed

After you've completed your reconciliation, if the month-end totals still do not match, repeat the process. If a discrepancy remains, then you may need to go back further in your transaction history to identify the issue, which is why regular reports are so valuable.

Similarly, if you have more than one account, you'll want to repeat this process across all of your accounts to create a consolidated, comprehensive statement that accurately reflects your financial standing.

Example Bank Reconciliation Statement

Formats may vary, but typically a bank reconciliation statement will look something like this:

 

Bank Balance

G/L Balance

Notes

Ending balance for 07/31/2022

$10,340

$10,192

 

Check #5327

($650)

 

07/24/2022 - uncashed payment

Check #5329

($410)

 

07/27/2022 - uncashed rebate check

Sample Co. July payment

$720

 

07/30/2022 - deposited but not posted

Fake Name LLC July payment

 

($540)

07/14/2022 - recorded twice in ledger

DD Sender July payment

 

$380

07/15/2022 - direct deposit

Bank transaction fees

 

($42)

07/02/2022 - fees from 06/2022

Accrued interest

 

$10

07/02/2022 - account interest from 06/2022

Adjusted Ending Balance

$10,000

$10,000

 

 

In the example above, the end of month totals for the company's bank statement and corporate balance sheet vary by $148. While this variance isn’t alarming, without an accurate understanding of your current finances, you might overdraft a specific account, miss fraud attempts, or overlook billing errors.

The line items below the initial ending balance account for this $148 variance by cataloging:

  • An outgoing $650 supply payment that hasn't yet been cashed by a vendor
  • An outgoing $410 rebate check that hasn't been cashed by one of your customers
  • A $720 payment from one of your customers that hasn't hit your bank account
  • A $540 accounting error where a customer payment was recorded twice
  • An unrecorded $380 payment because a customer used direct deposit
  • Bank fees of $42 reflecting the previous month’s transactions
  • Account interest of $10 accrued during the previous month

Make Payment Processing a Breeze with Invoiced 

When it comes to your financials, avoid assumptions and always verify that your transactions are being handled correctly. And if you'd like to incorporate bank reconciliation statements into your corporate accounting without a lot of headaches or extra labor, check out our cloud-based Invoice Payments offering. Schedule a demo today!

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