Bank reconciliation: Definition, advice, and more

Bank reconciliation (or bank rec) compares your company’s internal accounting with your bank’s records. The goal is to keep your books error-free and up-to-date. 

Bank reconciliation is a vital part of running a successful business. It helps you: 

• Gain insight into your company’s finances
• Detect mistakes, oversights and fraudulent activity
• Make decisions for your financial future based on accurate information 
• Get your books ready for auditing

In this article, we’re going to take you through precisely what bank reconciliation is, why it’s important, and how to do it.

What is bank reconciliation?

Bank reconciliation is the process of verifying that all the financial information you have on your company’s books matches the bank statements for your company accounts. Errors, misconduct, or fraud can then be dealt with quickly, and you can rest assured that your books accurately reflect the cash flow of your business.  

The goal of a bank reconciliation is to produce a bank reconciliation statement that checks two different sets of data against each other. These are:

1. Your company’s internal record of all your sales and expenses for a specific period, shown on your cash balance sheet.
2. A bank statement that lists the opening balance, closing balance and all transactions within that same period. Your statement will also include your bank fees.

The bank reconciliation statement is then used by auditors at the end of the financial year as a means of checking the accuracy of your books. 

If HMRC ever has reason to investigate your company to see if you are paying the right amount of tax, having an up-to-date bank reconciliation is vital.

What are some common mistakes to watch out for during bank reconciliation?

Even in the most meticulously run systems, mistakes happen. Here are some of the common errors that you could uncover in the bank reconciliation process:

• Input mistakes. This could be as simple as someone entering a 6 instead of a 9, and it can throw off your balance.
• Missing a deposit. If money has come in that you have failed to account for, you may have a lower balance than the bottom line that your bank statement shows — a satisfying error to uncover. 
• Forgetting to account for regular outgoing payments. Direct deposits and standing orders that are pre-authorised can be forgotten.
• Not accounting for bank fees and interest. In some cases, you may not have known that bank fees for a specific transaction or account type would be charged. In other cases, you may have accounted for bank fees, but they turn out to be more or less than you expected.

It’s not only mistakes that can be picked up through the reconciliation process. You may uncover dishonest behaviour from either within or outside of your company walls, including:

• Card fraud and other banking scams. Unfortunately, small businesses are too often the target of fraudsters. 

According to research conducted by Visa, 2 in 5 SMBs have lost money to fraudsters, predominantly due to bank account hacks, billing and invoice fraud and phishing scams. So if it happens to your business, you’re certainly not alone. With AI scams on the rise, keeping your accounts protected has become harder. 

Frequent bank reconciliation can help you identify fraudulent activity. You can then report it to your bank and the Financial Ombudsman Service immediately. Depending on the details of your case, you may be able to recover some or all of your funds. 

• Crooked books. We don’t like to think about it, but sometimes crime can be committed from the inside. If someone you have trusted with your accounting is intentionally mis-recording your company’s transactions, you will likely be able to pick this up on a bank reconciliation. 
• Improper usage of company funds. Say someone in your company has been using the company account to fuel their chocolate addiction without anyone’s knowledge. You’ll be able to pick this up quickly when you perform your bank reconciliation at the end of the month. 

As well as performing frequent bank reconciliations, you may want to consider taking out crime insurance to protect your business.

The bank reconciliation process

How do you prepare a bank reconciliation?

Luckily, preparing a bank reconciliation is a straightforward process. 

How to do a bank reconciliation

1. Choose your period.

This may sound obvious, but it’s a crucial first step. You must ensure that you work with the same period on your bank statement as the one in your cash flow statement.

Say you want to perform a bank reconciliation from the first to the last date of a particular month. However, your bank may issue statements from the 20th of one month to the 19th of the next. Your job is to mark off the period on your bank statement that correlates with the calendar month to ensure that you are comparing apples with apples.

2. Compile your documents.

You will need:

• A cash flow statement from your accountant for the given period. Create a vertical column that will allow you to check off transactions. This will help you prepare your bank reconciliation statement.
• A bank statement from your bank for that same period. 

3. Compare cash inflow 

You can opt to do this manually or with accounting software that does the slog work for you. The HMRC provides a list of commercial software suppliers to help you with your record-keeping. Many of them are free to use. 

Here’s the process, noting that if you use automation software, some (or all!) of these tasks may be done for you:

• Identify all the amounts that have been deposited into your account in that period. 
• Compare the deposited amounts on your bank statement to the credit side of your cash flow statement. 
• Mark off all the transactions on your cash flow statement that occur on both statements. 
• Make a note of any discrepancies and amounts that may not have cleared with your bank yet. Note that there may be amounts that have been recorded in your company’s statement that will only be reflected in the following month’s statement. 

3. Compare cash outflow

Just as you’ve done with the inflow of cash into your business, compare all your expenses to reflect what is on the bank’s record. 

Again, this can be done with accounting software or manually. 

4. Make corrections and follow-ups

First up, make corrections to your internal reporting. If, for example,  you haven’t accounted for interest or bank charges, now’s the time to make those amendments.

Follow up as soon as possible on any discrepancies you spot. If you think money has flowed out of, or into, your account in error, let the bank know immediately. Report any activity that you believe to be fraudulent. The sooner you can bring this to the attention of the authorities, the better. 

It’s also your opportunity to follow up with your employees if you identify any activity that doesn’t add up.  

5. Compare the balances

Once you’ve made your amendments, it’s time to compare the final balances of each statement. With everything accounted for, errors amended, and pending transactions noted, the balances of the bank statement and your cash flow statement should be the same. 

6. Prepare your bank reconciliation statement

This is a simple statement that lists any discrepancies between your cash flow statement and bank statement, including adjustments that need to be made, cheques that still need to be cleared and amounts that are coming in. 

At the end of your cash flow statement, you should have an amount that matches your bank statement for the same period. 

Some accounting software will generate this for you automatically.

How often should bank reconciliation be performed?

Bank reconciliations are often done monthly. Your monthly bank statement can be a great reminder that it’s time, and makes for a relatively straightforward comparison. 

But there’s no hard and fast rule here. You may find that it suits your business to do them more frequently than that — perhaps every fortnight. 

It’s important, however, not to wait too long, as you want to be able to deal with mistakes and wrongdoing while you still have the power to do something about them, and they don’t have too much of an impact on your business going forward. 

Quickfire summary

Bank reconciliation is vital to ensuring you have a good handle on your company’s finances.

In an ideal situation:

The info the bank has for your accounts = the info you have on your company’s books

If you find discrepancies, it’s not necessarily a train smash.

In many cases, there’s an easy explanation for why the two statements differ. It may be that:

• Cheques have not been cashed. You may have written or received a cheque that has not yet been deposited. So while the amount may appear on your company’s books, it won’t yet be reflected on your bank statement.
• Money still needs to be cleared. If you have received a deposit that has not cleared yet, your books may not match exactly.

In some cases, you may have to make adjustments to your internal reports. You may find, for example, that: 

• A transaction has been entered incorrectly. (It happens!)
• Bank charges and interest have not been accounted for.
• Pre-authorised amounts, such as direct debits and standing orders, have not been factored into your cashflow statement.

It’s also possible that you may uncover fraudulent activity. Perhaps someone has used one of your accounts for an unauthorised purchase, or you have been the victim of cybercrime. 

The sooner you have this information, the more agency you have to make changes to get back on track.