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What Is a Bank Reconciliation Statement?

What Is a Bank Reconciliation Statement?
Susan Guillory
Susan GuilloryUpdated June 13, 2023
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As you manage your business’s finances, you will of course want to make sure that all the transactions you have are recorded correctly. To that end, it’s important to understand your bank reconciliation statement.But what is a bank reconciliation statement, and why do you need to look at yours? While, yes, it is one more financial statement and one more task on your to-do list, let’s look at why you shouldn’t avoid understanding this important document.Recommended: Annual Revenue Meaning and Calculation

What Is the Purpose of a Bank Reconciliation Statement?

The bank reconciliation statement is designed to help you check to ensure that what’s recorded in your accounting software matches your bank account transactions.Much like you might look at your personal credit card statement to make sure there are no fraudulent charges, you should also look at your bank reconciliation statement to make sure that all deposits and withdrawals align with what you have personally authorized in your business.

Examples of Bank Reconciliation Statements

In a perfect world, your bank statement perfectly matches what you have in your accounting software, but sometimes that’s not the case. Let’s look at a few examples.

There’s More in Your Bank Account Than Your Accounting Software

Let’s say you wrote a check to a vendor for $5,000, and this is reflected in your accounting software but not your bank account because the vendor hasn’t cashed the check. It’s extremely important that you do record any checks you write, since sometimes the recipient takes a few days (or weeks or months) to cash them, and you want to ensure you’ve got enough in your account to cover the expense.

There’s More in Your Accounting Software Than in Your Bank Account

Maybe the opposite occurs. You show you’ve got $5,000 more in your accounting software than what appears in your bank account. Maybe you received an electronic payment from a client, and this payment was recorded in the software but the actual money hasn’t hit your account yet. In this case, it’s important to not spend the money before it’s actually deposited in your account.

The Numbers Don’t Match Up for Another Reason

Because most accounting platforms automatically update data from your bank website, this doesn’t happen much, but if the numbers don’t align, you may not have entered in a credit or debit. It’s wise to review your accounts weekly or monthly to make sure that every transaction is entered correctly.

How to Do a Bank Reconciliation

Now let’s look at how you can do your own statement reconciliation. Depending on how many transactions you make, you may want to do this as frequently as weekly, though monthly may be sufficient.

Step 1: Start with Last Month’s Balance

If you reconcile your accounts monthly, start with the closing balance from the previous month. If you’re opening a bank account in 2023, you’ll have a zero balance to start with.

Step 2: Assess Deposits and Withdrawals

Your accounting software should have each expense that your bank account shows, as well as any undeposited checks. If everything lines up, your work is easy.

Step 3: Account for Those Pending Transactions

For deposits, be aware that recently-paid electronic payments may not have been transferred to your business bank account yet, though they appear in your accounting software. And for checks you’ve written that haven’t been cashed, make a note and don’t spend that money or you might end up in the negative.

Step 4: Include Interest and Fees

If your bank charges you a monthly fee, be sure to include that expense. And if you have an interest-bearing checking account or money market account, include the interest accrued since the last time you reconcile your accounts.

Benefits of a Bank Reconciliation Statement

When it comes to your business finance management, the more data you have, the smarter the decisions you can make. For example, once you have reconciled your accounts and see that you have profits, you can decide when to reinvest your profits to grow your business.And keeping statements over time may be wise, especially if you get audited by the IRS. Also if you need to go back to review previous expenses or want to get the big picture of what your finances look like, historical data will help.Another of the advantages of a bank reconciliation statement is to spot potentially fraudulent charges. Whether that comes from your debit card being compromised and someone using it to make purchases, or a dishonest employee trying to charge an extravagant lunch on his company card, looking at the bank reconciliation statement can clue you in to unauthorized transactions. This is especially helpful if you aren’t the only person at your company who has access to the business’ finances.Keeping track of your bank activity can also help you avoid mistakes. No one is perfect, and we all can mistype a number once in a while, but regularly reviewing your accounts ensures the numbers are correct.

What Are Common Problems With Bank Reconciliations?

One problem can occur if you’re using your personal bank account for business transactions. This can make it muddy to know which are personal transactions and which are for your business, and it can make filing taxes a nightmare. When it comes to business vs. personal bank accounts, it’s smart to keep them separate.As said before, you may have a discrepancy because of an uncashed check or payment that hasn’t been deposited, so record these as soon as they happen, but take note that they may not have hit your account yet. The problem can happen if you see you have a certain amount in your account and spend it, and then a large check gets cashed, putting you in the hole.Also be on the lookout for fees for insufficient funds. If you’re regularly reviewing your accounts and taking these cash-in-transit transactions into consideration, you shouldn’t end up overdrawing on your account, and therefore won’t incur fees. But if you do spend money that should have been reserved for an uncashed check, you risk spending more than what’s available in your account and being charged a fee.

The Takeaway

Your bank reconciliation statement is designed to help you get a handle on your debits and credits, keep an eye out for fraudulent charges, and avoid errors in your accounting.If you’re looking at ways to improve and grow your business, Lantern by SoFi makes exploring your small business loan options easy — with one short application, you’ll be matched with a loan offer.Find the best lending product for your needs

Frequently Asked Questions

Who prepares the bank reconciliation statement?
What is an example of bank reconciliation?
What is the difference between bank statements and bank reconciliation statements?
Photo credit: iStock/miniseries

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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