Bank Reconciliation
Ensuring your records match your bank statements
Bank reconciliation is the process of comparing your internal financial records with your bank statements to ensure they match. Regular reconciliation helps catch errors, identify missing transactions, and maintain accurate financial records.
Why Reconciliation Matters
Catch Errors Early
Reconciliation helps identify data entry errors, duplicate transactions, or bank mistakes before they cause larger problems.
Prevent Fraud
Regular reconciliation can help detect unauthorized transactions or suspicious activity in your accounts.
Accurate Financial Reporting
Ensures your financial statements reflect your true cash position, leading to better business decisions.
Tax Compliance
Properly reconciled accounts make tax preparation easier and provide an audit trail if needed.
The Reconciliation Process
Steps to Reconcile Your Bank Account
- Go to Finance > Banking > Reconciliation
- Select the bank account you want to reconcile
- Enter the statement date (usually the last day of the month)
- Enter the ending balance from your bank statement
- Review the list of transactions in the system
- Match each transaction with your bank statement by checking them off
- Add any missing transactions that appear on your statement but not in your system
- Identify any transactions in your system that haven't cleared the bank yet
- Verify that the difference between your records and the bank statement is zero
- Click "Complete Reconciliation" to finalize
Understanding the Reconciliation Screen
- Beginning Balance: The ending balance from your last reconciliation
- Ending Balance: The balance from your current bank statement
- Cleared Balance: The sum of your beginning balance and all cleared transactions
- Difference: The amount by which your records differ from the bank statement (should be zero when reconciled)
Common Reconciliation Issues
Outstanding Checks or Deposits
Transactions you've recorded but that haven't cleared the bank yet. These are normal and will be included in your next reconciliation.
Solution: Mark these as uncleared and include them in next month's reconciliation.
Bank Fees or Interest Not Recorded
Banks often charge fees or pay interest that you may not have recorded in your system.
Solution: Add these transactions during reconciliation, categorizing them appropriately.
Transposition Errors
Switching digits when entering amounts (e.g., entering 1,540 instead of 1,450).
Solution: Look for differences that are divisible by 9, which often indicates transposition. Correct the amount in your records.
Duplicate Transactions
The same transaction recorded twice in your system.
Solution: Delete the duplicate entry to correct your records.
Best Practices for Bank Reconciliation
- Reconcile Monthly: Perform reconciliation at least once a month, after receiving your bank statement.
- Don't Skip Months: If you miss a month, go back and reconcile it before moving forward.
- Keep Documentation: Save bank statements and reconciliation reports for your records.
- Investigate Discrepancies: Don't force a reconciliation if there's a difference—find and fix the error.
- Separate Duties: If possible, have someone other than the person who records transactions perform the reconciliation.
Real-World Example
"Aisha runs a tailoring business and reconciles her bank accounts on the 5th of each month when her statements arrive. During her May reconciliation, she noticed a AED 250 difference between her records and the bank statement. After reviewing the transactions, she discovered she had recorded a fabric purchase as AED 1,250 when it was actually AED 1,500. She corrected the error in her system and completed the reconciliation with a zero difference. This process not only fixed her accounting records but also updated her fabric cost tracking, ensuring her pricing calculations remained accurate. Without regular reconciliation, this error might have gone unnoticed and affected her profitability analysis."