How to reconcile a bank statement step-by-step

Understanding bank reconciliation

Reconciliation is a crucial step in financial planning and analysis. Think of it as the “checks and balances” in place to track your company’s cash flows. The monthly bank statement can give you an actual cash balance, but that rarely matches what your general ledger says you should have in the bank. Reconciliation shows you what’s behind those discrepancies.

Why is it important to reconcile your bank statements?

Bank reconciliation gives you an accurate view of your company’s finances and a firm grasp on how much you have available to cover expenses.

Here are the major reasons why it’s important to reconcile your bank statements:

Identifying accounting errors

Bank reconciliations help detect errors, duplications, and discrepancies in financial records. Sometimes there may be errors in your accounting system, while other times there may be bank errors. Correcting these mistakes is crucial for accurate financial and tax reporting, preventing potential tax overpayments or underpayments.

Detecting fraud

Reconciling bank statements is a key tool in detecting fraud, such as altered checks or unauthorized transactions. By identifying discrepancies early, you can take steps to stop fraud and recover lost funds. However, there's usually a limited window to report and correct these errors, so they need to be caught early.

Managing risk

Accurate financial statements, supported by regular bank reconciliations, help your business plan strategically and make informed decisions. They offer a clear picture of cash flow and financial health, allowing investors and management to make decisions based on reliable financial data.

How to reconcile a bank statement

To complete a bank reconciliation, you’ll need your company ledger and your bank statements for the current and previous months.

The bottom line is that you have two records of deposits and withdrawals. In the general ledger, money flowing in is a “debit” and money flowing out is a “credit”. Bank accounts classify deposits as “credits” and withdrawals as “debits”. To reconcile the two records, match debits to credits and credits to debits. Here’s how:

1. Collect your bank statements.
2. Open the general ledger.
3. Match debits in the general ledger to credits in the bank statement.
4. Match credits in the general ledger to debits in the bank statement.
5. List all accrued general ledger debits and credits outstanding.
6. Add the sum of the outstanding items to bank statement final balance.
7. Compare the total to the general ledger balance.

Adding outstanding entries from the general ledger to the final cash balance on the bank account statement should give you a total that’s equal to the final balance for the period in the general ledger. If not, you have a discrepancy. When that’s the case, you should investigate the cause and check for recording errors made by your company or the bank.

Example of a bank reconciliation statement

Bank reconciliation statements align a company's financial records with its bank records, highlighting and correcting discrepancies.

Consider XYZ Corporation, which recorded a month-end balance of $150,000 in its books. The bank statement, however, displayed a balance of $152,500. Upon review, XYZ Corporation discovered an unrecorded bank deposit of $3,000. Additionally, it overlooked a bank service charge of $500 and an automatic loan payment of $2,000 during the month.

The reconciliation process enables the accountant to identify these discrepancies. As a result, XYZ Corporation can adjust its records to accurately reflect its cash position. Below is a simplified example of how this reconciliation might look in a table format.

Sample bank reconciliation statement

This example demonstrates how discrepancies between the bank statement and book balance were resolved through the bank reconciliation process, making sure both balances are aligned at $150,000.

Take the hassle out of bank reconciliation with Ramp

Bank reconciliation can be a major contributor to a healthy financial culture, or it can be a monthly nightmare for your accounting department. To optimize your reconciliation process, consider using expense management and accounting software like Ramp.

To better understand what Ramp can do for your company, read about how one of our clients cut reconciliation costs by 75% using our expense management system. Their firm used to spend 40 hours a month on reconciliation—that’s now down to 10.

Reconciling account balances is essential for any small business or established enterprise. Ramp can simplify the often time-consuming process through our corporate cards with real-time expense tracking and reporting automation.