Bank Reconciliations: Your Frequently Asked Questions Answered

by Jeff Heybruck, CEO, Lucrum Consulting, Inc. 

I often receive questions from small business owners about bank reconciliations and whether it is important they do them. Below you will find the answer to a few of the most frequently asked questions regarding bank reconciliations.  

What are bank reconciliations and why are they important? 

Other than just being good accounting practice, there are definite reasons for reconciling the books to the bank statement each month.  The purpose of a bank reconciliation is to confirm transactions on the books match what has gone through the bank. The process of doing a monthly bank reconciliation clears all the transactions that are posted on the statement and identifies any outstanding payments or deposits to ensure an accurate register balance (the amount shown in the financial statements). Some business owners make the mistake of adjusting their books to tie to the bank, but this fails to account for a deposit that was made on a Saturday or a check that was mailed close to the end of the month. There are many valid reasons why the amount shown on the financials would not match the ATM receipt.

If this is your first time considering performing a bank reconciliation, there are affordable virtual CFO services for small businesses that can help to ensure you are taking the proper steps for your bank reconciliations or can even help perform them on your behalf if you do not have the in-house financial expertise needed to do so.   

If I have my bank linked to my accounting system and the transactions download automatically, do I still need to reconcile?

With bank feeds it is possible to directly match transactions at the download stage and to add in missing transactions, but most businesses also write checks, so a bank reconciliation for a checking account will confirm if all checks have cleared and identify which ones have not.  Bank feeds are susceptible to the same technical issues from which all online services suffer.  They rely on an internet connection and online connectivity.  The bank, or connection to it, could drop for a space in time and sometimes the pause is so short that you would not even know that it has happened.  Once the connection is restored, transactions might be skipped or duplicated in the first download.  A monthly bank reconciliation provides the opportunity to find these duplicated or missing transactions.  

What other reasons are there to do a bank reconciliation?

Bank reconciliations are a good way to identify fraudulent transactions that might have slipped through on the bank feed when adding/matching multiple entries. For example, if ABC Company writes a check for $100 that is intercepted by Mr. Bad Guy who then alters the check to be $1,000, a bank reconciliation would identify this discrepancy. A bank feed might alert a keen bookkeeper to the discrepancy but, at the same time, it might import the transaction as a duplicate check. Only by doing a proper monthly bank reconciliation would this fraud be caught and reported to the bank to hopefully get the additional $900 returned.

This sounds very manual and I’m against paper. What do I do when I’m done reconciling?

As with much of accounting, it is a manual task. Some software will take a “guess” and attempt to check off items and, occasionally, it works. There are some tricks that make it easier- we recommend doing all deposits first and confirming that amount ties to the statement. The reason being is there are usually less deposits than payments. Once the deposits tie, tackle the payment side. This way if there are any discrepancies, we know exactly which side of the statement they are on. As long as the monthly reconciliations are kept up, it’s not too time-consuming and is part of the month-end close process.

When finished doing a monthly bank reconciliation, print or save as a .pdf the detailed reconciliation report. Some software offers a summary showing totals, but this is not helpful if there is ever a discrepancy or something doesn’t roll correctly from month to month. We still print our reconciliation reports and attach them in this order: bank statement, reconciling report, voided checks (to explain skips in the check numbers), and then deposit detail. These are scanned, filed in a folder by year, and then immediately shredded once the scan is confirmed to be legible.

We hope these steps will help you understand the importance and value of performing monthly bank reconciliations. In our connected age, it’s understandable that some folks think this valuable step in the month-end close process is outdated but, as explained above, bank feeds are not designed to catch fraud and often result in duplicate entries.