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What are Bank Reconciliations?

Bank reconciliations – a lot of business owners have heard of the concept but aren’t entirely sure what they are or how they are done. If that includes you, don’t worry, we’re here today to answer the age-old question: what is a bank reconciliation, anyway?

So, read on for an introduction to bank reconciliations that will leave you a little wiser and ready to conquer a crucial corner of the bookkeeping world. (Or at least understand it.)

What is a Bank Reconciliation?

Let’s get right to it. A bank reconciliation – also called a ‘bank rec’ by the cool crowd – is a way to check the accuracy of your bookkeeping data. More specifically, it is the process by which you determine if there are any differences between your bookkeeping records and your bank’s records, and if so, why.

Why Are Bank Reconciliations Important?

Excellent question. Bank recs are important because your bookkeeping must be accurate in order for it to properly describe what is happening at your company, and the recs help make that happen. If your bookkeeping isn’t accurate, it can cause a whole host of problems: you might misrepresent your profits, you may pay the wrong amount in taxes, or you might have an inaccurate idea of how your company is functioning. None of these things are good, and they all decrease the value you get out of your books.

How Do You Do a Bank Reconciliation?

Let’s get down to the nitty gritty. To do a bank rec you need your monthly bank statement and access to the reconciliation portal in your bookkeeping software. (QuickBooks, Xero, and Sage are all common examples.) Imagine you just opened your bank account, so this is your first statement. Your software will ask you to enter the opening balance at the beginning of the month, (which in this case is $0), the closing balance, and the closing date. After you enter that information, you will be directly to the reconciliation window.

Here you will see a list of all of the transactions recorded in your books for the bank account in question during the time frame in question. Next you select each transaction on the statement that you find in the books and add any transactions which are missing. By doing so, you should create a scenario whereby the opening balance + the selected debits + the selected credits = the closing balance.

Once the equation above is satisfied, the account is technically reconciled, but your work isn’t done. You also need to review any unselected (unreconciled) transactions that are in your books and decide whether they are there in error and should be eliminated, or perhaps should remain for now, but in an ‘uncreconciled’ state. If you don’t eliminate them, they will stay in the reconciliation portal and be displayed when you do next month’s reconciliation – at which point you can decide once again if they should stay or if they should go. (Possibly a reference to the Clash.)

Close up of a check and pen tip, indicative of checks often messing up bank reconciliations.
Checks are notorious for remaining un-reconciled. Don’t let them mess up your bank reconciliation – arm yourself with knowledge and get your bank recs right!

What Are Examples of Unreconciled Transactions?

The most common type of unreconciled transaction is a check. Often a check won’t be cashed until weeks after it was written. This means that if you input a check in the books when you write it, but it hasn’t been cashed by the end of the month, it will be in the books but not on the bank statement. (A check that has been sitting in the reconciliation window for a long time, by the way, is often called a ‘stale check’.)

When that happens, you will be left with an unreconciled check that should be investigated. If you are confident that it was indeed written, you should give it a couple of months to clear. If a few months go by and it still hasn’t cleared then it’s probably a good idea to confirm that it was written, and if so, you may wish to call your bank and cancel it. Once that is done you can eliminate it from your books and be free of it once and for all. (If it was never written, then of course you can eliminate it right away, or go ahead and write it.)

The other most common kind of unreconciled transaction is simply a transaction that was entered in error. If a transaction that isn’t a check is in the books but not on the bank statement it was likely entered accidentally, the date on it is wrong (sometimes people input the wrong year, for example), or if it is at the end of the month it might not show up until the next statement. If you find transactions like this, investigate them and correct them, delete them, or wait until next month, as needed.

Are Bank Accounts the Only Accounts that Get Reconciled?

Bookkeepers and accountants do all kinds of reconciliations, but bank reconciliations and their closely related cousins – credit card reconciliations – are the most common examples. (Credit card reconciliations are basically the same as bank reconciliations, although there generally aren’t checks involved.) 

Your bookkeeper also likely reconciles any liabilities which you may have on your books, for example a loan or a mortgage. In those cases they compare the balance of the debt in the books at the end of each month to the bank statement, and ensure that the proper amount of interest has been recorded.

So there you have it, our handy dandy introduction to bank reconciliations. We hope this helps you in your business journey, or at the very least the next time you are at a cocktail party, and someone says, “what is a bank reconciliation?”, you can pop up and wow the entire crowd with your bookkeeping prowess. (To be honest, we’re not sure that’s ever happened, but hope springs eternal…)

Want to learn some other basic bookkeeping? Check out this post with everything you need to know about balance sheets. Or, if you’d prefer to learn about payroll, try this great article on the best payroll providers for San Diego businesses. (It’s applicable all over, but we really love San Diego, so it was written with the people of America’s Finest City in mind – much like the classic movie Anchorman…)

Who are we? We’re My SD Bookkeeper. San Diego’s premier bookkeeping and business consulting firm. We work with businesses all over San Diego County in a wide range of industries – from real estate to dentistry. So, if you need help with anything related to your books or your back office, we’re here to help. Give us a call today!

By the by, if you’re more of a visual learner, try the video introduction to bank recs below.

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