What Does the Term "Bank Reconciliation" Mean in Accounting - More Than Accountants

What Does the Term “Bank Reconciliation” Mean in Accounting

The process of matching and balancing values in accounting records with those reported on a bank statement is known as bank reconciliation.

Bank reconciliation is an essential aspect of financial management. To balance the accounts in company accounting, a credit must be matched with a debit.

To put it another way, if a client makes a payment, the payment must be matched with the associated invoice in order for the amounts to be effectively balanced.

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How does it work?

All of the money received from customers will be listed on a bank statement. Each payment is linked to an invoice issued by your business and an amount recorded in your books. These two amounts’match,’ and the process of matching is referred to as bank reconciliation.

Similarly, as soon as a sum owed to a supplier is deducted from your bank account, it should be recorded as a cost.

A transaction is considered ‘outstanding’ if it shows in the accounting records but does not appear on the bank statement. The pending items represent potential conflicts between accounting records and bank statements that must be resolved.

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What is the significance of bank reconciliation?

Having transactions in your bank account that aren’t accounted for in your accounting system provides you an erroneous impression of your bank balance. This could result in you paying the wrong amount of tax.

Having transactions in your bank account that aren’t accounted for in your accounting system provides you an erroneous impression of your bank balance. This could result in you paying the wrong amount of tax.

When it comes time to file your taxes, extra or missing transactions make things tough. Even if you didn’t do it on intentionally, underreporting profits might result in a slew of HMRC headaches. You can find yourself on the receiving end of some expensive fines.

If you include excess or even duplicate transactions, on the other hand, you may end up paying more tax than you should because your profit calculations are affected by the errors.

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The three ways to reconcile your bank accounts

There are three alternatives for reconciliation, depending on the programme you use and the bank with which you’re registered.

1. Perform a manual reconciliation.

Manual reconciliation against a paper bank statement or a PDF version of this on your computer is maybe the oldest way.

To match and reconcile transactions, you might even have your online banking open in a browser window alongside your accounting software.

It’s evident how time-consuming this task is.

This could indicate that people are merely putting it off, implying that their accounting isn’t delivering the information they require.

2. Import and download

As a result, technological advancements have supplied a remedy.

In the first instance, you may be able to download your bank statement and import it into your accounting programme.

As a result, reconciliation becomes a chore of comparing items in one on-screen table to those in another.

3. Link your bank account.

Connecting the bank feed directly to your accounting software, on the other hand, is the gold standard for convenience of use because the transactions are loaded automatically and almost instantly in the background.

This can speed up the reconciliation process to the point where it becomes something you do every day for a few minutes, ensuring your accounting is always up to date.

Whether or not your bank supports Open Banking will determine this. Many, but not all, do.

Some accounting software even offers features to automatically reconcile transactions on top of bank feed functionality.

If you get a payment with the same reference every month, for example, you can set up the programme to reconcile it right away.

Artificial intelligence is increasingly being used to improve this, allowing accounting software to recognise new or abnormal transactions and reconcile them automatically without the need for user input (though it’s always a good idea to double-check).

Steps for bank reconciliation

When you compare your sales and expense records to the records kept by your bank, you have completed a bank reconciliation. It’s how you double-check your company’s accounting figures.

1. Get bank records first.

The bank must provide you with a list of transactions. A statement, internet banking, or having the bank deliver data directly to your accounting software are all options. You’ll need both statements if you have a current account and a credit card.

2. Obtain business documents

Open your income and expense ledger. This could be done in a logbook, a spreadsheet, or a piece of accounting software. With the use of data capture tools, certain accounting software will automatically pull in bills and receipts and extract the data.

3. Determine where you want to begin.

When was the last time the balance in your business books and your bank account were the same? From there, begin the reconciliation process.

4. Go over your bank deposits.

Ascertain that each deposit is recorded as income in your accounts. Fill in the blanks if something is missing. You must determine whether the transaction was a sale, interest, a refund, or anything else.

5. Go over your books to see how much money you’ve made.

Each entry should correspond to a bank deposit on your account statement. Find out why anything is missing. For example, a customer payment might have bounced.

6. Make a list of all bank withdrawals.

You should keep track of all bank withdrawals in your books. This includes expenses such as bank fees, which you may not have considered yet.

7. Go over your expenses in your books.

Each entry should correspond to a withdrawal from your bank account. If this isn’t the case, figure out why. It’s possible that one of your payments hasn’t cleared yet, or that you paid with cash or a separate account.

8. Balance at the end

Your company bank balance should match the totals in your business accounts after you’ve confirmed all the deposits and withdrawals. This is where you’ll begin your next reconciliation.

Problems with bank reconciliation

You’ll come into mysterious transactions from time to time, no matter how you handle bank reconciliation. There will be quantities in one set of records that do not appear in the other. Don’t be alarmed by it. This is why you’re performing bank rec, and it’s usually a simple answer.

Troubleshooting bank reconciliation issues

Mismatches can take a long time to discover. To get there, you’ll have to go through invoices, receipts, emails, and diary entries. Weekly – or even daily – bank reconciliation might help you avoid these time-consuming searches because you’ll have a clearer, more recent memory of the transactions you’re looking at.

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