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What is bank reconciliation and how to use it effectively

Helping to alert you to fraud, lower your tax, and keep your bookkeeping in order, bank reconciliation is an essential process for small businesses to master. What is bank reconciliation, what is the purpose of a bank reconciliation, how does it work, and how often do you need to do it? Find out more about this crucial accounting process with our definitive guide.

Bank reconciliation explained

So, what is bank reconciliation? Put simply, bank reconciliation is the process by which you can ensure that the information held in your business’s accounting record matches up with the information in your business’s bank account. When the two figures are exactly matched, you will have “reconciled” your bank account. However, if the figures don’t match, then the bank account is considered to be “unreconciled”.

How often should you reconcile your bank account?

It’s a good idea to do a bank reconciliation every time you receive a statement from the bank. If your business handles a large number of transactions, this could be at the end of every day. More commonly, bank reconciliation is conducted at the end of the week or month.

How to do bank reconciliation

To do a bank reconciliation, you’ll need to match the cash balances on your business' balance sheet with the corresponding amounts in your bank account. Then, by determining whether there are any differences between the two, you can make changes to your records, identify any potentially fraudulent transactions, and eliminate discrepancies. So, how does that actually work? Here’s our step by step guide for how to do bank reconciliation:

  1. Obtain your bank records – First up, you’ll need to get a record of transactions from the bank. You can find this on your bank statement, through online banking, or by asking the bank to send this data directly to your accounting software.

  2. Get your business records – Then, you need to get your business records (a ledger of income and outgoings). This is likely to be in a spreadsheet, in your accounting software, or a logbook.

  3. Look at your deposits – Now, you’ll need to match the deposits in your records with the transactions listed on your bank statement, making sure that each deposit is listed in your accounts as income.

  4. Check your income – Every entry in your books should match up with a deposit on your bank statement. If an entry isn’t accounted for, it’s important to find out why.

  5. View your withdrawals – Next, you should check that all your withdrawals are recorded in your books. This should include the obvious expenses, such as rent and payroll, as well as things you may not yet have accounted for, such as bank fees.

  6. Check your expenses – Now, you need to ensure that all of your expenses match up with a withdrawal listed on your bank statement. There may be a wide range of reasons why your expenses aren’t listed on your account, such as payments not clearing in time or being made from a different account.

  7. Reconcile the accounts – Finally, after all withdrawals and deposits have been checked, the total balance on your bank statement should match up with the total listed in your business accounts. When it comes time to do another bank reconciliation, you can use this as the starting point.

What is the purpose of a bank reconciliation?

There are a number of benefits associated with conducting a bank reconciliation. Most importantly, getting bank reconciliation wrong may mean that you’ve got an inaccurate view of the amount of money in your bank account. By detecting missed payments, calculation errors, and double payments, you can ensure that it doesn’t look like you’re underreporting your sales – something that could lead to a tax inspection from HMRC. In addition, bank reconciliation can help you spot fraudulent transactions and theft, while it’s also an effective means of keeping track of accounts payable and accounts receivable.

Bank reconciliation tools

There are a broad range of bank reconciliation tools and software packages that you can use to make the entire process a little easier and reduce errors. For example, if you’re using Xero, most banks can simply send transaction data directly to your accounting software through a secure connection. Then, when it’s time to do your bank reconciliation, the software will pull up each transaction and suggest matches with corresponding entries.

Read our Guide on Reconciliation in Accounting

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