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What is bank reconciliation?

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Last editedOct 20202 min read

As a small business owner, it’s important to get bank reconciliation right from the start. Helping you to detect accounting errors and even fraud, bank account reconciliation can ensure you stay on top of your company’s finances and understand exactly what’s going on in your accounts. Find out everything you need to know with our definitive guide, including how to do bank reconciliation. First question: what is bank reconciliation?

Bank reconciliation meaning

Bank account reconciliation is an accounting method that can help you match up the data in your accounting/bookkeeping software with your company’s bank account, ensuring that they provide the same value on a specific date. If the balances are exactly matched, you can consider your bank account to be “reconciled”. While bank reconciliation used to be a painstaking manual process that took a considerable amount of time, the rise of cloud accounting software has made bank account reconciliation a much more efficient process, as many of the steps along the way can be automated.

Bank reconciliation isn’t the only type of reconciliation that your business may need to complete. There’s also vendor reconciliation (where you compare the amounts owed to suppliers to transactions on your payable ledger), customer reconciliation (where you check discrepancies between your accounts receivable ledger and your receivables control account), and intercompany reconciliation (where you produce consolidated accounts for companies which are part of a larger group). However, bank reconciliation is the most commonly used type of reconciliation in accounting.

Purpose of bank account reconciliation

There are several reasons why it’s important to reconcile your company’s accounts on a regular basis. Put simply, if you don’t implement a bank account reconciliation process, you may not have an accurate sense of how much money your business really has on hand. From double payments and calculation errors to fraudulent transactions, there are a wide range of issues that could potentially compromise the accuracy of your accounting records. Plus, there’s a legal component to bank reconciliation too. If you’re under/overreporting your sales, HMRC could get involved and trigger a tax inspection.

How to do bank reconciliation

Firstly, it’s important to understand that bank reconciliation shouldn’t be a yearly or even a quarterly process. You should be producing bank reconciliation statements once a week, at least. Particularly vigilant companies may consider doing bank reconciliation every day, although if you’re a small business with a low volume of transactions, this may not be strictly necessary. Bottom line: the longer you wait to do bank reconciliation, the longer it will take and the more likely it is that there’ll be errors. So, when it’s time to kick off your account reconciliation, where do you start? Here’s how to do bank reconciliation in a little more depth:

  1. Get your bank and business records – Firstly, you need to obtain a bank statement for the period that you’re doing a bank reconciliation for. Then, you need to get your accounting records (the relevant documents will be a ledger of income and outgoings) for the same period.

  2. Check your opening balance – Now, you should ensure that the opening balance on your bank statement matches up with the opening balance listed on your accounting records.

  3. Check your transactions – Next, you need to match the transactions on your business’s accounting records with transactions listed on your bank statement. If at any point you find that an entry doesn’t match, it’s important to explore why this is the case and adjust your accounting records accordingly.

  4. Check your closing balance – After you’ve reconciled all your transactions, you should double-check that the closing balance on your bank statement and your accounting records matches. If it doesn’t, you need to return to step three to work out what went wrong.

While you can produce your bank reconciliation statement manually, the advent of accounting software means that isn’t always necessary. With software like Xero, you can simply arrange for your bank to send your business’s records directly to your chosen software package. Then, when you get around to doing your account reconciliation, corresponding entries will be matched automatically, which is likely to dramatically reduce the amount of time you need to spend on producing bank reconciliation statements.

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