A bank reconciliation is an important part of the daily accounting function for any business. In essence it is a matching process whereby you link the receipt of funds into your bank account with a sales invoice or payment of funds with a purchase.
By matching bank transactions with entries in your accounting software, the bank reconciliation, or bank rec, means you can stay on top of who owes you money and to whom you owe money. It also tracks the flow of cash and can help you plan payments and investments.
The need to carry out a bank rec is not solely for tracking purposes. It also relates directly to the foundation of accounting, the double entry bookkeeping system. By simply raising a purchase or sales invoice, you are in effect only creating one leg of the accounting entry. The receipt or payment of funds in the bank account creates the second leg and so it is important to link the two elements together.
How often should I complete a bank reconciliation?
The answer to this will vary dependent on the nature of your business. The ultimate answer is it is best practice to ensure your accounting software and bank statement remain in sync and balanced, and therefore if you have a large volume of transactions going through the bank every day, it may be a daily task. If you tend to have fewer people paying you money and you run one or two payment cycles for creditors a month, you may be able to manage this weekly.
With accounting software managing much of the process these days, the calculation of average debtor and creditor days is taken care of for you and the system will calculate it based on the date of the bank entry, not the date of reconciliation.
How do I complete a bank reconciliation?
Most accounting software packages will do most of the work for you these days as they will allow you to establish an automated link with your bank account(s) so you can see the current balance, receipts and payments without having to log in and out of the banking portal. The accounting or bookkeeping software will hold the details of any sales and purchase invoices you’ve raised. The majority of mainstream packages provide an automated matching system so you can easily allocate the bank transaction to the relevant entry in the accounts. In many cases the software will work through the following process for monies received (debtors/sales):
- Automated reconciliation – The software looks at the details of the bank transaction and suggests exact matches. So, if it is a receipt it will look at your sales invoices and then pick the customer, date and value that matches the receipt. You simply need to agree it to create the transaction.
- Manual allocation or ‘fuzzy’ match – If the software cannot match the transaction with a high level of accuracy, it may offer you a choice of transactions that could match. You can then select the relevant transaction(s) and allocate the payment. This is most useful when a customer settles multiple invoices in a single payment.
- Manual entry – If there is no obvious transaction matching the bank entry you will need to create a transaction in the accounts to attribute the receipt to. This is highly unlikely from a sales perspective, as you are rarely paid money without a transaction having been completed, and so you are more likely to come across this scenario in payments out, for instance expenses.
The process is similar for purchases/payments out, but as noted in step 3 the bank rec provides the opportunity to create transactions ‘on-the-fly’ to match the payment to, if a corresponding purchase invoice or order has not been raised.
To complete the bank rec, every payment and receipt shown in the bank account needs to be matched to a corresponding transaction in the accounts. Even the odd pennies that can accrue from over/under payment need to be accounted for.