How To Do a Bank Reconciliation in 5 Easy Steps

There are two main components of a bank statement reconciliation. First, you need to ensure that all transactions on your bank statement appear on your check register. Then, see to it that the remaining transactions in your check register are recorded properly, even though they haven’t cleared the bank.

We’ll break these two components into five easy steps to illustrate how to do bank reconciliation manually. We’ll also show you how you can do it easily using QuickBooks Online.

Step 1: Ensure the Prior Period Is Reconciled and Gather the Necessary Documents

Your reconciliation period should always begin from the last time the account was reconciled or from the account’s opening if it’s never been reconciled. Monthly reconciliation of bank balances is a key internal control for managing cash. Before you start, ensure you have your bank statement, check register, and the previous reconciliation statement on hand.

For illustration purposes, here is a bank statement from a fictitious bank called First Capital Bank.

Below is the check register of the First Capital Bank checking account in the books of Paul’s Plumbing:

At first glance, you can see that the June ending bank statement balance ($9,970) and check register balance ($11,800) don’t agree. Since there are timing differences in book and bank recording, you need to perform a bank reconciliation to reflect the effect of unrecorded transactions in the book and bank records.

Before starting the June bank reconciliation, it’s important to review the May reconciliation, shown below. Notice that check #100 for $1,000 was a reconciling item. If this check doesn’t clear in June, it will remain a reconciling item on the June reconciliation. This is why reviewing the previous month’s reconciliation is crucial.

Step 2: Trace Deposits to the Register

Deposits must appear both in the bank statement and check register, and those that appear only in either the bank statement or check register are reconciling items. Here’s how you analyze deposit items properly:

1. Deposits in the register but not on the bank statement: These are probably timing differences if they were deposited at the very end of the month. Otherwise, they need to be investigated as an error by the bank or in the check register.
2. Deposits on the bank statement but not on the check register: These are most likely omissions from the check register that need to be added, but you should verify the bank deposits are valid before adding.

Let’s use the sample information below:

Pay attention to the items highlighted in green. The first step in reconciling is matching the bank statement line items with the check register.

For example, on June 15, there’s a cash deposit of $5,400 with reference number 2297. In the check register below, you’ll see the same deposit recorded on June 14. Now, repeat this process for the $1,500 cash deposit and the $700 deposit made by Kristen Berman.

The cash deposit of $1,500 with reference number 2298 is present in our cash register. However, there are a couple of items in the bank statement and check register that need to be addressed.

• First, we see a deposit of $700 from Kristen Berman in the bank statement that is not recorded in the check register;
• And second, the check register reported a deposit of $5,220 with reference number 2299 that doesn’t appear in the bank statement.

We need to make adjustments for these two items:

• Deposit by Kristen Berman not recorded in the books: The deposit appears in the bank statement so we don’t need to adjust the bank statement balance. After verifying the deposit shown on the bank statement is correct, we add the $700 deposit to the check register.
• Cash deposit by Paul’s Plumbing not reported in the bank statement: The cash deposit of $5,220 appears in the check register, but not the bank statement, so this will be a reconciling item on the reconciliation report. This reconciling item is called a deposit in transit or deposits made that have not yet been recorded by the bank.

Step 3: Trace Withdrawals to the Register

The concept from Step 2 applies here as well. If a withdrawal shows up on the bank statement but not in the check register, it’s either a book or bank error that needs to be investigated. If it’s in the check register but not on the bank statement, it becomes a reconciling item.

The checks reported in the bank statement above pertain to vendor checks that Paul’s Plumbing issued. The vendors deposited the checks to the bank, which resulted in a deduction in the bank statement beginning balance.

Matching Checks in the Check Register and Bank Statement

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Direct Debits and Bank Service Charges

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Step 4: Enter Missing Transactions Into the Register

In performing bank reconciliations, always remember that adjustments for missing transactions only pertain to items on the bank statement not in the check register. Hence, we don’t make journal entries for deposits in transit and outstanding checks.

Below are common book errors that are often discovered during the reconciliation process. These errors should be corrected in the accounting records before the reconciliation is completed. reconciling items that needs adjustment:

• Customer payments made to the bank
• Collection of customer notes made through the bank
• Interest earned in the bank account
• Bank service charges
• NSF (non-sufficient funds) checks deposited

An NSF check is a check from your customer that “bounced” because they didn’t have sufficient funds in their checking account to pay the check. It’s a good idea to give all of your deposited checks a few days to clear before spending the money in case any of them bounce. Otherwise, a bad check from your customer could result in your check bouncing.

In our example above, the only error corrections needing book adjustment would be the deposit by Kristen Berman and the bank service charge. We record the adjustments in the check register as follows:

Step 5: Reconcile Balances and Create the Reconciliation Statement

A bank reconciliation statement is a schedule showing the differences between the bank statement balance and checking account. The most common format of a bank reconciliation statement is the adjusted balances format. It reconciles both the bank and book accounts

An alternative format would be the bank-to-book format. Here, you only need to adjust the bank statement balance to arrive at the check register balance. While this format is easy, the bank-to-book format won’t show the equality of bank balances.

For illustration purposes, we’ll use the adjusted balances format.

After reconciling the bank accounts, the true cash balance available to spend is $12,490.

Bank Reconciliation Using QuickBooks Online

Reconciling bank accounts in QuickBooks Online follows a similar process. However, it will be a little bit easier since QuickBooks Online will automatically pull up your check register. Knowing how to reconcile bank statements in QuickBooks Online will make the reconciliation process easier and stress free.

As an example, let’s reconcile accounts using the data from First Capital Bank on QuickBooks Online.

Step 1: Enter Bank Balance, Charges, and Interest

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Step 2: Match Transactions With the Bank Statement

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Step 3: Record Book Reconciling Items

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Step 4: Complete Reconciliation

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Step 5 (Optional): Generate a Bank Reconciliation Report

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The Importance of Reconciling a Bank Statement

1. Ensures the availability of cash: Timely bank reconciliations help your business know the amount of cash in the bank. It helps reduce the occurrence of bouncing checks and failed payments due to insufficient funds.
2. Catches fraud and manipulations: If one of your employees withdraws money from your bank account or a supplier forges a check you issued, you will certainly see them in the bank statement. In large businesses, accountants and internal auditors sometimes use the proof of cash or the two-date bank reconciliation. The proof of cash not only reconciles the ending balances of the checking account but the current period receipts and disbursements.
3. Detects error and fees: If you recorded checks in the books by mistake, you can correct them by looking at the amount stated in the bank statement. More so, you can look at the actual check that comes with the bank statement. The bank statement will also reveal fees and penalties that they charged to your account.
4. Explains differences in bank statements and check registers: A bank reconciliation shows (1) items that should be recorded in the check register and (2) items that are yet to be recorded by the bank. By considering these reconciling items, you can verify that the check register and bank account have the same balance.

Bottom Line

Reconciling bank accounts is an important control over cash. It ensures that all cash transactions are accounted for and justified. Without preparing a timely bank reconciliation, you risk your business into losing cash without you knowing. With QuickBooks Online, it’s even easier to reconcile bank accounts because you only need to tick transactions until the cleared balance matches the statement balance.