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What are Bank Reconciliations?

What are account reconciliations and why do we need to do them? In the age of automatic bank feeds they may seem like an unnecessary formality, but they are still as important as they were 10 years ago.

What Is A Reconciliation?

A reconciliation involves comparing the balance of an account in the accounting system to an externally generated report. We most commonly reconcile bank accounts and credit card accounts to monthly bank or credit card statements. But we could also compare an inventory count to our inventory account. Many accounting programs allow you to reconcile any balance sheet account, so revenues and expenses cannot be formally reconciled. It does not make sense to reconcile all balance sheet accounts. For example, a company vehicle sitting on the books is going to be recorded at historical cost and depreciation will be recorded based on a selected method. The actual value of the vehicle is not how the vehicle is valued (unless there are some unusual circumstances). It would be pointless to reconcile the account for the vehicle against a market value. In general checking accounts, saving accounts, credit card accounts, and loan accounts should be reconciled when statements are available. Other accounts such as inventory should be reconciled to a physical inventory account.


The Reconciliation Process

Reconciliations typically begin by entering the information from a statement/report such as the balance and date. That information is then compared to the book amount. If they are the same the reconciliation process is complete, but that rarely happens. Often times the amounts are different, some of these differences are from errors, others can be explained. The reconciliation process involves finding and correcting the errors and validating the other differences. The following are differences you are likely to see:


Errors- these are legitimate errors and need corrected. Either the person entering the information into the accounting program made a mistake or the bank made a mistake. If the error involves entering incorrect information in the accounting program corrections should be made in the program. If the bank made an error the bank should be notified and a reminder should be set to make sure the bank has corrected it within a timely manner. Typical errors are omitting or adding a 0, moving a decimal point, and entering a negative number where there should be a positive and vise versa.


Checks/Payments that have not cleared the bank- this will cause the bank balance to be higher than the book balance. Charges on a card close to the statement closing date may not be reflected on the statement. Checks may not have been cashed by those who you have wrote them out to. You should review these items closely and make note of any that are outside of the expected window. Charges at the beginning of the month should be recorded by the end of the month, but a check that was wrote out 45 days ago may not clear if it is in the hands of an employee or vendor that tends to deposit checks once every few months. Review all of these items and investigate ones that should have cleared by now. In the event that they have not cleared and should have make sure you have not double recorded them. This happens often when someone fails to match an item that is coming through the bank feed to a payment that has already been recorded.


Deposits/Credits that have not cleared the bank- this will cause the bank balance to be lower than the book balance. As with the checks/payments that have not cleared it is important to check to see if there are any that should have cleared by the statement date and investigate further. Sometimes these items have a holding period on them that is longer than normal. You should also check that they have not been double recorded.


How Frequently Should Reconciliations Occur?

It's standard for reconciliations to occur when statements are ready. This is typically once a month for bank accounts, credit cards, and loan statements. Reconciling inventory should occur whenever there is a physical count of inventory. This will depend on the business, but if you keep inventory on hand we recommend that it is counted at least once a year, although many businesses benefit from more frequent inventory counts.


Reconciliations Do Not Guarantee Accuracy

Reconciliations are one tool used to make sure that books are accurate, but alone they do not guarantee that the books are correct. They do provide a means for checking the balances of balance sheet accounts, but they do not check that those transactions have been categorized correctly. Because of this the books could be grossly inaccurate despite perfect reconciliations. This is also why we do a review weekly and a comprehensive review monthly.


Reconciliations Tips

Adjusting balances with the reconciliation discrepancy account is not best practice and could get you in trouble with an audit. If differences are present make a strong effort to find and correct or explain them.


Reconcile regularly for books you can use in the management of your business. It also prevents the headache that can occur when you're stuck doing reconciliations for a whole year in one day.


If you can't find the differences save the reconciliation for later. Sometimes the answer is staring at you, but you need a break.


Some accounting programs state that your account is reconciled after accepting the transactions from the bank feed. This is not a formal reconciliation and should not take the place of one. Always reconcile to an outside source so you can verify the balances are accurate.


Don't rely on reconciliations for accurate books. Thorough reviews of you books should still be completed.


Reconciliations may seem like an inconvenient formality, but they really are an important part of bookkeeping. Staying on top of them is an important step in maintaining accurate books when used with other checks and balances.