How to do a bank reconciliation: step by step guide
Posted by: V.Weber
In this article we will describe a step-by-step process for reconciliation of bank accounts for non-accountants. While we work mostly with not-for-profit organizations, bank reconciliation process is the same as for a for-profit entity. In this example I will be describing a reconciliation of a year-end balance (December 31st), but the process is the same for month-end or week-long, whatever period is necessary to reconcile.
1. Start with your bank statement.
First start with the bank balance (the balance at either year-end, month-end or whatever period is necessary to reconcile). Look at the balance in the bank statements and compare it to the book balance in your accounting system for the same period December 31st. Balances typically do not match and can be off by a few hundred, thousands or millions of dollars depending on the size of the organization.
2. Review your bank statement transactions in detail.
In this step, you are looking at the line-item transactions included in the bank statements and compare them to the transactions recorded in your books’ general ledger cash account. One of the examples of items that could be potentially on the bank statements but not on the general ledger of the company’s books is bank fees or another withdrawal or deposit that was not recorded on the company’s books.
3. Review your books’ general ledger cash account transactions.
Next, you need to scrutinize your book cash transactions looking for the items that were recorded on the books but have not yet cleared the bank account and consequently are not appearing on the bank statements. An example of these transactions would be check written to a vendor for services received when the vendor has not deposited it on his/her end. Pay especial attention to the period ends, so the first day and the last day of the of the period. There could be a deposit recorded in the books that have not cleared the bank yet because it typically takes a couple days to process.
4. Adjust the balance of cash.
After identifying the differences between bank and books you can adjust the cash balance accordingly. Outstanding deposits (or deposits in transit) will increase your cash balance on the general ledger. Outstanding withdrawal (or checks written) will decrease your cash balance on the general ledger.
5. Record the reconciliation.
When all discrepancies are identified between bank and book balance, a journal entry to record the adjustment needs to be prepared. For example, there was $500 of bank feed on the bank statement that was not recorded on the books. The following journal entry would need to be made to bring the book balance down to reflect the bank fee expense:
| Dr. | Bank Fees | $500 |
| Cr. | Cash | $500 |
Below is an example of a bank reconciliation that needs to be kept for each bank account that is reconciled to the book balance.
Example of bank reconciliation (template):
Having proper documentation around bank reconciliation process is paramount for year-end processes as well as for a successful and smooth audit. Especially for a not-for-profit organization, an entity that has to go through an extra level of financial scrutiny. If you need help with reconciliations or with setting up proper processes and procedures for your organization, feel free to schedule a free consultation with me and I will walk you through the process and with providing guidance and necessary tools for your organization.