Bank Reconciliations aren’t something that most management/senior accountants do anymore. They’re more of a check to make sure if everything adds up for compliance, and as important as it is to have to your bank account reconciled with your books, many businesses fail to do that.

I’ve had clients who haven’t done bank reconciliations for years, and truth be told, if you do it after five years, you will practically have to go back the five years to resolve the differences / problems. It’s one of those things which can unnecessarily spin out of control in a short amount of time, so it’s good to do bank reconciliations regularly, and know where your money is, before the gap between your business’ financial statements and your bank account widens.

So, the idea behind a bank reconciliation is basically to reconcile the balance in the Bank Account in your books/GL with your bank statement. Why would you need any such reconciliations? Well, for several reasons:

- At the end of every month, there will be checks (if you’re American) and cheques (if you’re British) that you have received, and booked in your GL, and even deposited in the account, but they have not yet cleared and, therefore, do not show up on your bank statement. The result of this is that your bank statement will understate your bank balance by the amount posted to the GL and not posted to the bank statement.

- Similarly, at the end of every month, there will be cheques/checks that you have sent out to your vendors, but they have not yet cashed or deposited those cheques at their end. The result, your bank statement will be overstated, whereas your GL will be understated compared to the bank statement.

- Bank charges. These are very typical of first world banks. Charges for check books, debit cards, remittances, wire transfers, cheque processing, etc. etc. You do not get an invoice for such transactions (or any others that are deducted from your account via a standing order), and you, therefore, need to book these to your GL when you see them on your bank statement (given that they are valid and that the bank is not ripping you off and somebody’s not having a party with your money that you’re not aware of).

- Compliance. Try and get an audit done without a bank reconciliation; it’s not going to happen. Even small businesses, who may occassiaonally require a financial audit of their books and financial statements for lenders, etc. will need bank reconiliations.

So, what exactly is a bank reconciliation? The goal with a bank reconciliation (or a bank reconciliation sheet, used to complete a bank reconciliation) is to show both the bank and GL transactions, and bridge the gap between the two numbers. At the end of completing such a reconciliation, you will come up with a reconciled balance, which will show entries that appear on the GL but not on the bank statement and vice versa. What you will need to do now is book all those entries which appear on the bank statement but not on the GL in your books. The result of this booking should give your bank account in the GL the same balance as the one on the bank reconciliation sheet.

To make your life easier, I’ve compiled a spreadsheet (which you can download at the end of this article), using which, coupled with the following instructions, you can easily complete a bank reconciliation.

What you need?

1. Bank Statement for the period being reconciled
2. Your Bank Account printout from your GL listing all transactions posted to the bank account in questions
3. The Bank Reconcliation spreadsheet (available for download at the end of this article)
Here’s what you need to do:

Compare the bank statement and the GL printout line by line in chronological order. Your GL printout should be in chronological order just like your bank statement, but if it is not, simply export it into excel and do a Data > Sort by the appropriate column.

So, you go through both the bank statement and GL line by line. Cross out items (identical items / entries) that appear both on the GL and the bank statement. Leave blank, highlight / mark or make note of items / entries that appear on the GL and not on the bank statement and vice versa.

Now you enter these items in the appropriate area in the spreadsheet. If you have more line items to enter than the spread sheet has, you can simply add more rows and adjust the summation formula accordingly. No complex formulas have been used in the making of this spreadsheet.

That’s it, if you’ve entered the right numbers in the right places against the right entries, your bank reconcliation will balance, and you just make the appropriate entries in your GL, entries for items that appear in the bank statement and do not appear in the GL.

Sounds simple enough? It is.

Any problems. Feel free to post them as comments.

Click here to download the Bank Reconciliation Spreadsheet.

This entry was posted on Friday, May 9th, 2008 at 10:03 am and is filed under Accounting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.