The Bank Reconciliation Process

• When the monthly bank statement arrives, a company begins reconciliation. This most often occurs once a month for smaller businesses but could be weekly or even daily for large businesses. Access to real-time online bank balances makes more-frequent reconciliation easier. The balance on the bank statement is compared to the bank balance showing in the accounting program. Both balances are adjusted for timing differences in the recording process. Any discrepancy after that points to an error by the bank or an error in the accounting records. Reconciliation assists in tracking down exactly where the problem lies.
  
  

Adjustments to the Bank Balance

• Common adjustments to the bank balance involve adjusting for checks that have not yet cleared or deposits that have not yet been recorded. Outstanding checks are subtracted from the balance and unrecorded deposits are added to match the treatment these items have received in the accounting records. The final items that are either added to or subtracted from the bank balance are bank errors. Bank errors are often corrected in the next period, but they cause the bank balance to be incorrect during the reconciliation as the correct amounts are recorded in the accounting system.
  
  

Adjustments to the Book Balance

• Most of the adjustments made to the accounting balance relate to amounts that are calculated by the bank and appear for the first time on the bank statement. Examples include overdraft or non-sufficient fund (NSF) charges, interest earned or interest paid and monthly maintenance or other bank fees. Some companies record all of these items before preparing a bank reconciliation. Large companies often produce a preliminary bank reconciliation to identify these types of transactions. They then record the bank transactions and produce a final reconciliation that will not contain any of the month-end bank items.
  
  

What Happens Next

• After the bank reconciliation has been completed at the end of each period, an accounting clerk or bookkeeper makes any accounting corrections that were not made during the reconciliation. The clerk also discusses any bank errors with the bank and follows up to ensure they are corrected. The bank reconciliation for the next month starts with the new balances. Any errors on either the bank side or the accounting side that were not corrected from the prior month will show up again on the new reconciliation and will continue to do so until corrected.