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Everything you need to know about Bank Reconciliations


Bank Reconciliations
Bank Reconciliations

Bank reconciliations to me are possibly the most important part of a month end close


Before we get into why...let's first start with:



➡ What is a Bank Reconciliation?


A Bank Reconciliations is a matching of the transactions on your bank / credit card statements to the transactions in the general ledger


It allows you to confirm that the balances for your bank accounts & credit cards in your general ledger match to you the actual statements on the banks website



➡ Why are Bank Reconciliations so Important?


If a Bank Reconciliation isn't completed, I wouldn't trust anything that I'm reading on a company's financial statements



Why?


Because there's no way to validate that the transactions used to compile the numbers shown on the general ledger


There would be no way to confirm that there are no mistakes in the numbers being used, or even worse, that there was no fraud




➡ How are Bank Reconciliations performed?


Bank Reconciliations are performed by entering in the ending balance shown on your bank / credit card statement,


and confirming that the transactions in your accounting software


+ the beginning balances shown


= the ending balance on your statement


If the amounts don't match, it can either mean a mistake in the data being used, or certain exceptions which can be valid



➡ What are Some Common Reasons for Why a Bank


Reconciliation May Show Different Ending Balances Between Your Bank and General Ledger?


Here are a few usecases


❌ There are duplicate transactions in your general ledger


➡ action here is to remove these duplicate transactions


❌ There are missing transactions in your general ledger


➡ action here is to add back these transactions


✅ There are transactions that haven't cleared the bank yet, such as checks that have not been cashed


➡ this is an acceptable reason, and should be monitored each month to ensure accuracy


✅ Transactions posted on a cutoff date


➡ often times, transactions will be posted in your general ledger on the same date in which the period ends on your bank / credit card statement.


When that happens, it is common for some transactions to be shown in your general ledger that haven't yet cleared the bank.


In this instance, you'll want to ensure that next month these transactions are cleared


Those are a few of my thoughts based off of my experiences working with startups, and closing out their books.

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