How to complete a bank reconciliation

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Bank reconciliation is a rather common accounting practice. While it isn’t a legal requirement, it is highly recommended as it helps you check the records of the various accounts across your company and also helps you maintain an overview of your fund flows. So, what exactly is bank reconciliation? How does it give you a clearer insight into your cash flow and – most importantly – how do you carry it out? The answers to these questions can be found in this article.

Bank reconciliation – what is it?

Bank reconciliation is a process for monitoring your accounts. It enables a company to compare transactions posted in its 512 account against those listed in its bank statement. In this way, the company can ensure that its accounts match the bank statements for a given date. To ensure that the two balances match, the company’s accounting team will cross-check the documents. In short: both balances must be identical. Bank reconciliation is a process that is completed periodically, and usually at the end of the month.

Good to know – what is the 512 (“Bank”) account? The 512 account represents a company’s bank account. This asset account is used for making payments (cheques, transfers etc.) and is not to be confused with the 513 account, which is used solely for liquidity.

From a wider perspective, carrying out bank reconciliation allows a company to analyse its cash flow situation while also checking that all fund flows (payables and receivables) have been posted accurately on both sides.

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What does bank reconciliation do?

This accounting method serves a number of purposes: It lets you rectify any errors that may have occurred when amounts are posted

  • It makes you aware of any oversights in relation to the transactions listed in your bank statement (e.g. any bank or overdraft fees)
  • It lets you check any direct debits that have been executed by your bank but that your company would not otherwise have been aware of
  • It lets you ensure that your incomings and outgoings are listed in your general ledger (the general ledger is a document that shows all of a company’s account movements)

In summary, bank reconciliation helps you to check that the balances of your bank account and accounting records match. Not only this – it also helps you assess your cash flow and ensure that your written accounting records are up to date.

Bank reconciliation is a vital part of your cash flow monitoring process and is a step that is highly recommended for all companies. In practical terms, your company should put together a plan for carrying out bank reconciliation as often as possible.

Why are there differences between my bank statement and my written accounting records?

Accuracy and reliability are two fundamental aspects of running a company. Posting errors, omissions and other similar issues must be avoided as far as possible; these are not trivial points and will eventually lead to a company falling into bankruptcy. This is why making the most of bank reconciliation processes is so essential. These processes act as a monitoring mechanism that allows a company to detect and rectify any irregularities.

Bank reconciliation ensures that the balances of a company’s accounting records and bank account match. In this way, it compares written accounting records and bank transactions for a defined timeframe, with the aim of detecting the anomalies that are causing any disparities. More generally, companies will find that it is almost impossible for their accounting and bank records to be perfectly in sync with each other. The main reason for this – and, in fact, the only reason – is that the transactions executed are not taken into consideration on the same date on both sides.

Here is an example to explain it more clearly: Your company settles a supplier invoice for €4,500 on 23 January. At the same time, your customer service team receives a cheque for €7,000. These two fund flows are reported in your general ledger and, more specifically, in your 512 account. The flows appear in your company’s accounting records but you can’t see them on the account statement from your financial institution.

So, how can this disparity be explained? One of the most common explanations is that there is a gap between the time when a fund flow is triggered and when it appears on the bank’s side. Essentially, deciding to trigger a flow of funds does not mean that it takes place immediately. For example, when you sign a cheque, your bank account isn’t debited straight away.

It is important to know that there may be a gap of several days between the dates showing when a transaction occurred and, by the same token, between the dates in your written accounting records and the fund flow in your company’s bank account.

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How do you carry out bank reconciliation?

Although it is an optional process, bank reconciliation is highly recommended as it enables you to keep an overview of your cash flow. The key steps for successfully completing a bank reconciliation are set out below.

Collect the necessary documents

You will need a range of supporting documents for the reconciliation process, specifically:

  • Bank statements for the period in question
  • Your general ledger or a statement from the relevant 512 account
  • Summaries from any previous bank reconciliations
  • All supporting documents for cash movements (cheque stubs, cash remittances, cheque remittances etc.)

Draw up a bank reconciliation summary

To draw up a bank reconciliation summary, you must compile a table containing the following information:

  1. The first row should show the amount of the bank statement
  2. Next, create two columns. The first column should include the ingoing and outgoing amounts that are shown in your accounting records but do not appear on your bank statement

3.Create another table with two columns. This table should show the ingoing and outgoing amounts that appear on the bank statement but do not appear in your accounting records 4.Add a row that calculates the notional bank balance based on your accounting records 5. Then, add another row with the amount in the bank account from your accounting records 6. Finally, add a row at the bottom that calculates the difference between the two previous rows When the bank reconciliation is complete, the bottom row should show no disparity between the amounts.

Calculate the bank reconciliation

To calculate the bank reconciliation, first gather your bank statements.

  1. Establish the starting balances, namely the bank account balance and the balance in your accounting records

2.__ Cross-reference the transactions__ shown in the bank account and the 512 account 3. Look at all incoming transactions posted (transfers, cheques, cash deposits) 4. Look at all payments made (card payments, transfers etc.) 5. Look at every cheque listed 6. Check the final balances

Check that accounts match

This step consists of checking line by line if your bank statement is accurate compared to your accounting records. It is relatively common to observe differences during this type of monitoring. While a difference in processing timeframes is often the main cause for these disparities, they may also be caused by a range of other factors, such as mistakes being made when posting amounts or invoices being duplicated.

Correct issues with entries during bank reconciliation Once disparities are identified, you must then correct the erroneous entries. To do this, you must post the missing entries in your 512 “Bank” account.

Bank reconciliation tools

Working on bank reconciliation can be tedious and time-consuming if you don’t have the right tools. Here are some ways that you can make the task easier.

Carry out your bank reconciliation using Excel

As soon as we start talking about numbers, the first tool that comes to mind is of course the most famous spreadsheet of all – Excel. It may well be the first port of call for carrying out bank reconciliation (while bearing in mind that it does have some limitations). Used by a large number of companies for many different tasks, Excel is a good way to manage your cash flow. The first point to consider, however, is its age. Yes, you read that correctly! Having been on the market for several years, the software has received multiple updates over time and today offers well-honed features. However, if you are not fully proficient in Excel, you should be careful: it can quickly become a source of mistakes and wasted time if you have multiple people tracking your company’s cash flow at once.

Carry out your bank reconciliation using accounting software

It is important to know that there are specific pieces of software that can perform bank reconciliation and complete software packages that can manage all of your company’s accounting and feature a bank reconciliation module. Do you have accounting and financial management software but an ERP tool that doesn’t generate your movements? There are modules that are used specifically for importing data and for bank reconciliation. They allow you to import bank statements, create bank entries selected in the statement, view entries already present before the import and so on. However, most accounting software doesn’t allow you to track your cash flow in real time.

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Automate your bank reconciliation with Agicap

Agicap is a cash management software made specifically for very small businesses (VSBs) and small and medium-sized enterprises (SMEs). Agicap gives you access to real-time, automated cash flow monitoring, can be integrated with your banks, accounting software and invoicing tools and automatically updates your cash flow. Agicap allows you to see a forecast of your cash flow for the next 1, 3, 6 or 12 months and beyond, enabling you to make sound decisions and giving you the assurance that your financial needs are being met. The software also lets you easily simulate the impact of crisis scenarios on your cash flow, whether it’s lower revenues, partial unemployment or mismatches in loan repayments. You can complete your bank reconciliation in just a few clicks. What’s more, Agicap automatically makes reconciliation suggestions for your paid and committed transactions. Say goodbye to manual cross-checking!

How Agicap can help you better manage your cash flow:

  • Simplicity: Agicap is extremely easy to use and doesn’t require extensive accounting expertise.
  • Automation: Agicap is connected to your banks and your in-house software, so updates all of your financial data in real time.
  • Visualisation: Agicap lets you see at a glance how your cash flow is developing and allows you to personalise your views.
  • Forecasting: Agicap lets you draw up your forecast directly within the tool and gives you an overview of your cash flow over several months or years, depending on your requirements.

You can also apply multiple scenarios to visualise the impact that certain events, such as hiring a new employee, making investments or crises, may have on your cash flow.

__Agicap is the perfect tool for closely monitoring your cash flow and automating your bank reconciliation. __

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