How to prepare bank account reconciliation

Account reconciliation process and two types of reconciliations; bank reconciliation with step by step instructions.

1. Nature of accounting reconciliation statement

It is important for businesses to make sure their financial information is accurate, complete and consistent. Among other tools used to accomplish this, preparing accounting reconciliations represents one of the more important ones. As a small business owner you may think that reconciliations are not such important, but tedious and time-consuming? Allow us to give you a few reasons that may change such perception. First, preparing reconciliations on a regular basis helps ensure that cash is not stolen from your business.  Next, reconciliations serve as a means of identifying and fixing accounting errors (i.e., making sure all sales were recorded, etc.).  Finally, reconciliations can assist in finding un-posted bank transactions or bank mistakes.

So what is an accounting reconciliation?

Account reconciliation is a process of comparing two sets of related records (usually balances) from different sources (accounts, systems, etc.), identifying and analyzing differences, and making corrections (if needed).

In preparing reconciliations, reconciling items can be found:

A reconciling item is one or several differences between compared records (balances) in an accounting reconciliation.

We will discuss accounting reconciling items further in this article.

2. Best practices in preparing account reconciliations

As may be the case with any other business process, there are several best practices for preparing account reconciliations:

  • First, it is important to prepare reconciliations on a timely basis at the end of a period (each month, quarter or year). The frequency of preparing reconciliations depends on the level of activity and risk of error associated with particular accounts.  For example, high-activity accounts (accounts receivable, accounts payable, cash, possibly fixed assets, etc.) should be reconciled on a monthly basis because activity within these accounts is high and inherent risk of errors is therefore high as well.  Such errors should be identified and corrected timely. Moderate-activity accounts (notes receivable, notes payable, long-term debt, possibly fixed assets, etc.) may be reconciled once a quarter because there is a certain (but not necessarily high) amount of transactions recorded in such accounts and risk of errors is somewhat lower.  Low-activity accounts (trademarks, owners’ capital, etc.) may be reconciled on an annual basis because such accounts have very limited (if any) activity and therefore, much lower risk of errors.
  • Second, reconciliations may result in reconciling items.  Reconciling items may be small or large.  If there are significant reconciling items, they should be investigated and necessary adjustments should be made in the accounting records to ensure there are no material errors in the financial statements.  Note that we mentioned “material errors” which in simple terms means errors that would affect a decision-making process of a business owner, creditor or investor.
  • Third, it is necessary to maintain segregation of duties in the accounting reconciliation process. There should be different reconciliation preparer and reviewer/approver. For example, bank account reconciliations should not be completed by the employee responsible for disbursing checks or depositing cash.  When such segregation of job duties is not maintained, if an employee embezzles cash by writing checks to him- or herself, he or she would be able to hide that when preparing reconciliations.  On the other hand, if there is a separate reviewer/approver of the reconciliation, then the employee wouldn’t be able to hide any wrongdoings.  Another example of segregation of duties is as follows: a person who handles payables and writes checks should not reconcile and review/approve the reconciliations for such accounts (but can prepare them for somebody else’s review/approval).
  • Finally, reconciliations should be filed and available in case one needs to go back to review what happened in the past. The most convenient way is to keep supporting documentation attached to reconciliations.
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