Be it for your personal finances or the largest corporations, the basic bank account reconciliation is one of the most simple yet invaluable tools available for keeping track of funds. On a personal level, this is usually a fairly straightforward exercise that can provide useful insight into your funds and money management.
Purpose of bank account reconciliation
The objective of performing a bank account reconciliation is to reconcile the cash you have available as per your books to those of your bank as reported on your monthly bank statement, taking into account any outstanding cheques written, deposits to be made, and other unaccounted for items such as bank service charges and interest earned. Not only does a bank account reconciliation help you keep track of your cash, it can also help you to identify errors in either personal or bank records so they can be addressed and remedied promptly. To that end, performing your reconciliation monthly on receipt of your bank statement is the most effective time as it enables you to address any discrepancies before they have a chance to accumulate or cause significant problems.
How to perform an account reconciliation
To perform a bank account reconciliation, begin with your cash on hand according to your personal record books and your bank statement. It may help to use a separate piece of paper or computer worksheet for the bank-to-books reconciliation and the books-to-bank reconciliation for ease of tracking.
For the bank-to-books reconciliation, write down the opening balance as per the bank statement. Deduct from that balance any outstanding cheques you have written that have not yet been cashed by comparing your cheque register to the statement, and add back any deposits you have to make that have not yet been processed by the bank. The sum of these amounts should be equal to the sum of your adjusted books record once you do that.
For the books-to-bank reconciliation, begin in the same manner and write down the opening balance as per your books. Deduct from that balance any bank service charges, interest charges, non-sufficient fund (NSF) cheques and fees and any automatic withdrawals you have set up that are not reflected in your personal books. Add back to the balance any amounts that the bank has collected on your behalf, usually in the form of notes receivable and unaccounted for automatic deposits and interest earned. The sum of these amounts should be equal to the above-calculated bank-to-books reconciliation.
If the two reconciliations do not agree to the same amount, this is indicative that either an adjustment was missed or an error was made either in your personal records or by the bank. Double check to ensure that no adjustments were overlooked, and then compare the balances to determine the difference between the two balances.
Bank account reconciliation errors
The three most common errors are an incorrect opening balance, deducting something that should have been added or adding something that should have been deducted, and transposition errors, so that for instance $1,234 is recorded as $1,243. The first error is easily remedied by double-checking that your opening balance matches your previously agreed month-end closing balance. If the second type of error is at fault, it can usually be found by dividing the difference by two, as the item was double-counted in the wrong direction, and seeing if that amount agrees to any adjusting items. If the third is the problem, transposition errors have a unique quality of being divisible by nine. Try dividing the difference by nine, and if that works, reviewing the books and statements for transposition errors may help you find the problem.
Upon identifying and adjusting for book and bank errors, the two final reconciliation balances should agree and your bank reconciliation will be complete. This will give you a clean slate as a starting ground going forward each month, and there will be the comfort of knowing that you are on top of your finances and any errors found can be addressed promptly- a worthy investment of what is unlikely to take more than twenty minutes of your time!