Bank Reconciliations – A Step-by-Step Guide:

One of the most important financial controls a company can have is the bank reconciliation process!

The bank reconciliation process can help identify any discrepancies between the balances in the bank account and the accounting books. It can also help uncover mistakes, oversights and even fraud.

If you have any role in running or managing a company, you should really know how the bank reconciliation process works and why it’s so important for your finances.

So here’s a step-by-step guide to performing a bank reconciliation. We have also outlined some tips on best practice.

What is a bank reconciliation?

Bank reconciliation is the process of matching book credits with bank withdrawals, and book debits with bank deposits, in order to reconcile any differences between the bank statement and the books of accounts.

Reconciliation also helps to determine how much cash a business actually has at a point in time.

We have previously written about why the bank reconciliation process is a key financial control for a company to put in place.

We also included bank reconciliations as one of our key accounting concepts that every business owner and manager should know.

So there’s no doubt that we are serious about bank reconciliations!

In this article, however, we get even more hands-on and explain exactly how to perform a bank reconciliation in practice!

What system to use for bank reconciliations?

Companies have a choice of two methods when conducting a bank reconciliation:

  1. The traditional way – this involves the entry of data and information into spreadsheets and the subsequent manual matching of books and bank records.
  2. The modern/progressive way – using cloud accounting solutions to do the work for you. A company’s financial data will be hosted on remote servers or “the cloud”. Modern online accounting solutions can then process a company’s data, identify discrepancies in accounts and generate a bank reconciliation statement. Fully automated! 

If your company already benefits from cloud accounting, you may not have to do some of the steps outlined below. It will depend on the capabilities of your cloud accounting software. At CloudCfo, we generally use Xero and Quickbooks Online to provide the best service for our clients. 

Automated bank reconciliations is one of the reasons why cloud accounting can save your business time and money.

So we now know all about bank reconciliations and the types of systems that can be used.

Let’s get started on the process! 

Step 1. Collate all relevant documents 

The first step when doing a bank reconciliation is to find and collate all relevant and necessary documents. Here are the documents that are usually required to perform a bank reconciliation:

A. Book records

  1. Books of accounts –  Books of accounts are key to bank reconciliations. This is where a company records its business transactions. If you haven’t yet got your books of accounts in order, here’s our guide on which books of accounts will best fit your business.
  2. Cash Receipts Journals/Cash Disbursement Journals – These journals form part of the books of accounts and are where cash payments and cash receipts are recorded. 
  3. Ledgers – Ledgers show the transactions and running balance of a particular account. For example, a ledger of accounts receivables will show you the different collectibles and collections made during a period, together with the running balance of the company’s accounts receivable. 

B. Bank records

  1. Passbooks – A booklet where banks print their clients’ bank transactions.
  2. Bank Statements – The digital version of the passbook. Companies can view their bank transactions via the internet – on their computer or their mobile phone. 
  3. Checkbook – this contains check stubs from previously issued company checks. It is important to complete a check stub for each check as this generates a helpful record or paper trail for checks issued.  
  4. Bank Loan Schedules – if your company has bank loans outstanding, the bank will issue bank loan schedules. This is required for reconciling items relating to company loans.

Step 2. Identify the key information 

Having collated all necessary documents, you then need to identify the information in each document that will enable you to perform the bank reconciliation. 

Here is the key information that must be extracted from each document before reconciliation can commence:

  1. Book debits
  2. Book credits
  3. Bank withdrawals
  4. Bank deposits

Once you have this information to hand, it should be entered or uploaded to the accounting system that your company uses – i.e. either manual or through an online accounting solution. 

Once this is done, you can start the matching process! 

Step 3. Match cash ledger credits with bank withdrawals

A company needs to match cash ledger credits with bank withdrawals. In short, every withdrawal from the company’s bank account should have corresponding transactions in the company’s books. 

What if there is a withdrawal recorded in the books of accounts but there has not actually been a withdrawal from the bank account? This might arise in a number of cases:

a. Outstanding or unreleased checks – outstanding checks have been issued by the business but not yet presented for payment by the payee. Unreleased checks have not yet issued to the payee but have already been deducted from the cash account in the books. In both cases, the payments won’t yet be reflected as withdrawn from the bank.

b. Cancelled checks – a check is canceled but not yet recorded in the books as cancelled.

What if there have been bank withdrawals but that do not have corresponding book entries? This might arise in a number of cases:

a. Delayed entries – Checks or cash payments already issued to a payee but not yet posted to the books

b. Bank charges – an example would be checkbook charges 

c. Bank loan interests –  interest payments incurred on bank loans

d. Withholding tax on interest on deposit – Withholding tax is the portion of an amount that is withheld by the payor of income, then paid to the government. In the case of banks, the withholding tax is on monies withheld by the bank from the tax on interest income on a client’s deposit account.

Tax on interest on deposit is just one type of tax that needs to be withheld by businesses in the Philippines. Here are some other withholding tax obligations in the Philippines

Step 4. Match cash ledger debits with bank deposits

The next step is to match cash ledger debits with bank deposits.

What if there are cash ledger debits that have no corresponding bank deposits? This could arise in the following situations:

a. Deposits in transit – deposits already recorded in the books but not yet deposited in the bank

b. Cancelled deposits – have been cancelled but not yet recorded as cancelled in the books

What if there are bank deposits that have no corresponding cash ledger debits? This could arise in the following situations: 

a. Deposited but not yet recorded – Cash already deposited but not yet recorded in the books

b. Withholding tax (WT) on bank loan interest – Interest earned by banks for loans made to clients are subject to tax. Part of the tax on interest income is required to be withheld. After deducting the full amount of loan interest, the bank will credit back an amount equivalent to the WT. This WT will then be remitted by the client to the BIR.

c. Release of bank loans – loan monies entering the company bank account that have not yet been recorded in the books

d. Interest income on cash balance – interest payments received from the bank and not yet recorded

e. Stale checks – this is a check that reverts back to the books and still remains payable if the check has not been cashed within a certain period of time

Step 5. Investigate book reconciling items 

Check for any oversights, errors or mistakes that should be recorded in the cash ledger books.

Reconciling items that will have to be added to the book balance will include, for example, cancelled checks, deposited but unrecorded checks, final withholding tax on bank loan interests and bank loan monies. 

Reconciling items that will have to be deducted from the book balance will include, for example, bank charges, bank loan interest and checks or cash payments that were already given to a payee but are not yet posted to the books. 

There may also be accounting errors which have to be reconciled within the book balance – depending on the nature of the errors.

So make sure that any errors or mistakes are investigated and resolved without delay! 

Step 6. Investigate bank reconciling items

After matching, separate all oversights, mistakes or errors that need to be listed as necessary adjustments to the bank balance.

Reconciling items that might have to be added to the bank balance might include a bank error in relation to a withdrawal. 

Reconciling items that might have to be deducted from the bank balance might include a bank error relating to a deposit. 

Again, make sure to watch out for internal company errors – or maybe even fraud! Investigate and resolve ASAP! 

Step 7. Generate a bank reconciliation report

You should now know the items that have to be added or deducted from the bank account, cash account and other book balances in order to successfully perform a reconciliation.

The company is now in a position to generate and print a report that should clearly identify the status of the bank balance, the specific items that have resulted in differences between the two balances and how they have been resolved and finally, any remaining differences that have yet to be reconciled. 

This is the final step. It’s now time to prepare your bank reconciliation report. Here’s how:

a. Prepare/generate your spreadsheet with three columns. An online accounting solution can already pre-generate this template for you and pull across data from your accounts.   

  1. The first column will be for the name of the reconciling items
  2. The second column is for the adjustments or amounts relating to the various accounts across the books
  3. The third column is for the adjustments or amounts relating to the bank balance

b. On the top row, input the unadjusted book and bank balances. This is your starting point and reference point.  

c. On the subsequent lines, input all deposits in transit and any outstanding checks.

  1. Deposits in transit should be added to the bank balance. Why? Because it had already been added to the book balance but has not yet been added to the bank balance
  2. Outstanding checks should be deducted from the bank balance. Why? They were already deducted from the book balance but not yet from the bank balance.

d. On the next lines, input all other reconciling items identified when performing Steps 5 and 6 above. 

Once this is done, your bank reconciliation report should be complete. The report is proof that your accounts have been reconciled. It is an important document that should be maintained by a company. If ever a discrepancy is identified in relation to the bank statement, the bank reconciliation can be used as evidence of what the company has done to resolve the issue. 

Want to outsource your bank reconciliation process and other bookkeeping transactions?

Bank reconciliations can be complicated if you aren’t fully aware of how the process works!

CloudCfo is an outsourced provider of accounting, bookkeeping and tax compliance services in the Philippines. We can help your company with bank reconciliations in addition to the full range of accounting, tax and finance services. 

If you are contemplating engaging an outsourced accounting and finance service provider, check out our article on the 7 ways that outsourcing your accounting and bookkeeping functions can add value to your business. 

CloudCfo can also be your virtual CFO. We do a whole lot more than basic bookkeeping and accounting functions. We can be your own professional financial consultant without the usual resources, time and costs that you would normally have when directly employing a CFO. Here are 6 benefits of hiring an outsourced Chief Financial Officer over an In-House CFO.

Visit us at cloudcfo.ph or contact us at enquire@cloudcfo.ph for your free initial consultation.

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