Bank reconciliation: what it is and how to reconcile a bank statement

Bank reconciliation can be a tricky and complex process when you don’t have the right tools. This is particularly true for organizations where expenses need to be coded or categorized before they can be submitted. Expense reports need to be reconciled to bank statements that may already have inconsistencies due to clearance times and end-of-month carryover.

Bank reconciliation for business is not the same as matching cancelled checks to your personal checking account statement. You need to track business expenses and match them to appropriate t-accounts in the general ledger. Deposits could come in via ACH, credit card sales, or paper checks. Reconciliation consolidates all that to give you workable data points.      

What is bank reconciliation? 

Business bank reconciliation is a process where expenses and revenue are matched up to the monthly bank statement. They’re then compared to the general ledger to ensure that financial reporting is accurate. It’s not an optional activity. Reconciliation is a vital first step in financial planning and analysis. Without it, there’s no way to confirm that your numbers are accurate.

Think of this as a “check and balance” system to track your company’s inflows and outflows. 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 why those numbers are different. It can also uncover errors that may have caused the discrepancies.    

Why is bank reconciliation important?

Accurate financial reporting is one reason why bank reconciliation is important. It also helps you to monitor spending. This is a point we’ll go back to later in this article because the timing on reconciliation and the expense planning laid out in business budgeting software can be integrated for a smoother reconciliation experience.

Bank reconciliation gives you a firm grasp on what you have available to cover costs and expenses. Revenue that is accrued in the general ledger may not be in the bank yet. It’s not uncommon for an income statement to show a profit for companies with a cash shortage in their checking account. Reconciliation tells you if you can meet short-term liabilities.     

When should you start reconciling bank statements (and how often)?

Most companies do bank reconciliation at the end of the month. Some do it on a quarterly basis. Ideally, it should be an ongoing process that never stops. That’s the only way to track spending in real-time and adjust as needed. Reconciliation is more than just an accounting process. It’s a monitoring system to guard the financial performance of your company.  

Waiting until the end of the month to do reconciliation can cause businesses to lose money that a daily reconciliation process could have prevented. Imagine a scenario where expense reports are being submitted weekly. Reimbursements are being issued throughout the month, but no one is checking to make sure the company can afford them.

The scenario above gets more complicated when employees use business credit cards to cover expenses and reimbursement is coming from the company bank account. The transaction will still be credited in the general ledger and show up on the bank statement, but there’s no itemized record outside of the expense report. We’ll explain below why that’s important.  

Crucial bank reconciliation terminology 

There are dozens of terms used by banks and accountants during the reconciliation process. We’ll spare you from those that you’ll likely never hear or see in a financial report and won’t insult you by including definitions of words like “check” and “ATM card.” The following is a list of terms we have used directly related to the bank reconciliation process:

·  Clearance times: The amount of time it takes for a deposit or withdrawal to go through a clearinghouse process and become available as cash.

·  End-of-month carryover: This is a term used to describe checks that are outstanding or deposits that haven’t cleared yet as of the end of the month when the books are closed.

·  Deposit in transit: Deposits sometimes take a day or two before they show up in the recipient’s bank account. They may show up as “pending” on your statement.  

·  Outstanding checks: When a company writes a check for a good or service and it hasn’t been cashed or deposited yet, it’s classified as “outstanding.”

·  Cash balance: The actual amount of cash your company has in the bank.

Below is a list of terms we use to describe reconciliation as part of the financial reporting process. We’ve added this extra information to illustrate the importance of business bank reconciliation and how it can directly affect P&L management.

·  General ledger: A general ledger is a record of all debits and credits for a company. It’s used in the bank reconciliation process to match transactions in the monthly bank statement. The “how-to” section below explains how that works.  

·  T-accounts: The general ledger is broken down into “t-accounts.” These are sub-accounts that help a company break down revenue and spending by department. Examples of common t-accounts are accounts payable, accounts receivable, inventory, cash, rent, and equipment. They’re useful in reconciliation for cross-checking.    

·  Accrual accounting: This is an important concept to understand when doing reconciliation. Most businesses use accrual accounting to keep track of revenue and expenses. That means the debit or credit is recorded when it is initiated, not when it happens. For example, invoices may go out with 30-day terms, meaning the money won’t come in for a month, but the revenue is recorded the day the invoice is sent.  

·  Short-term liabilities: In accounting, short-term liabilities are amounts due within twelve months. Reconciliation considers anything due before the next reporting period as a short-term liability that needs to get covered.  

·  P&L management: P&L stands for “profit and loss.” Managing that is a subject for an entirely new article. Let’s just say that reconciliation is a part of that.

How to reconcile a bank statement

There are several ways to do this. 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 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 is equal to the final balance for the period in the general ledger. If not, you have a problem. In most cases, that’s an issue with how revenue and expenses were recorded. In the next section, we’ll show you how to avoid that.   

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. The former can be achieved by automating expense tracking and integrating that data with business accounting software. Ramp can provide both. Our system also has controls to prevent unauthorized spending.     

To better understand what Ramp can do for your company, read about how one of our clients cut reconciliation costs by

75% by using our expense management system. Their firm used to spend forty hours a month on reconciliation. That’s down to ten. Imagine the possibilities. While you’re at it, think about how much better your life would be with reliable reporting.

Accurate reconciliation is critical for companies in the early stages still using business credit cards for startups and more established firms with multiple locations and revenue streams. The best way to ensure accuracy is by automating your data sources. Ramp can provide that for you. Contact one of our team members today to learn more.