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What Is Bank Reconciliation: Template and Step-By-Step Guide

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This article was updated on October 19, 2022 with new links, resources, and templates. 

Bank reconciliation may sound like a daunting task for a business owner, especially those without an accounting background.

As a business owner who already has too many tasks and not enough time, you may overlook or put off this important task. You need to know how much money in your bank you can spend. Bank reconciliation helps you do that.

Skipping out on bank reconciliation is not something you can afford to do. It is a necessary part of running a business. However, with these bookkeeper-approved tips and tricks, you can make bank reconciliation almost painless. 

We’ll explain what a bank reconciliation is and why you need it for your accounting and bookkeeping. Plus, we’ll share a free bank reconciliation template

What is bank reconciliation?

Many business owners check the balance in their online bank account or most recent statements. They assume that the number in front of them is the amount of money they have available to spend.

The problem with this approach is that it doesn’t account for the items that don’t appear on your bank statement yet. 

Let’s say a business has a bank balance of $20,000. The owner writes a check for new equipment that cost $8,000. However, the supplier hasn’t cashed the check yet. So you need to factor it into your balance. The true balance in the account is not $20,000. It’s $12,000 since the $8,000 is already promised to someone.

If the owner forgot about the outstanding check and withdrew $15,000 from the company’s account, the check would bounce.

A bank reconciliation also helps you identify transactions that went through the bank but weren’t recorded in the company’s accounting system. As more businesses opt to pull in direct bank feeds for their companies, this is less of an issue. But even direct pulls from bank accounts can have glitches that leave some transactions unrecorded.

To reconcile the bank, your company should compare the transactions. With bank reconciliation, you compare your bank statement against the transactions in your accounting software to ensure that everything is recorded.

Bank reconciliation terms to know

There are several commonly used terms in bank reconciliations that you should be aware of. 

Deposit in transit: Deposits that have been sent to the bank (either electronically or through a visit to the bank) but that have not been posted to the company’s account at the end of the period. This does not include payments expected to be received in the future from customers.

Outstanding checks: Outstanding checks are any checks written by the company prior to the end of the reconciliation period. They have not been cashed by the recipient yet. 

Not sufficient funds (NSF): A check may be rejected if the account does not have sufficient funds to cover the amount of the check. An NSF check may show up as being cashed by the bank with a reversal of the amount when the check is flagged for NSF. Most banks charge fees for NSF checks and these need to be recorded as well. 

Stale Checks: A stale check is one that has gone uncashed for a long time, usually over six months. Depending on the purpose of the check, the company may consider voiding it. Some checks, such as payroll checks cannot be voided and need to be remitted to state agencies. 

How often should you do bank reconciliation?

While bank reconciliation can be performed at any time, it is usually a monthly task. Your bank generates a monthly statement anyway, so each month you should compare your bank statements to your internal accounting records. 

The process of bank reconciliation is nothing more than confirming that what appears on your bank statements matches what you see in your accounting software. But, how does bank reconciliation work? 

How To Do a Bank Reconciliation

Each month, your business will conduct several transactions, so you’ll see money coming in and going out. Those transactions should all be tracked in online accounting software like QuickBooks or Xero. 

Also, you should see those transactions in your bank account (or accounts), usually a day or two after they occur. 

The details of doing a bank reconciliation will vary from software to software, but the basic process is the same across the board. 

1. Download your bank statement

The very first step of any bank reconciliation is locating your bank statement. The bank statement gives you the beginning and ending bank balances along with the activity for the period (which is usually one month). 

2. Locate reconciliation in your software or spreadsheet

If you are using accounting software such as Xero or QuickBooks, there is a section of the software designed specifically for bank reconciliations.

Once you open up the bank reconciliation module, you will find a list of all the deposits and withdrawals that are in your books. If you are using a spreadsheet to reconcile your bank, create a new copy of your template for the current period.

3. Reconcile the deposits

If you have already recorded all of your deposits in your accounting software, you should be able to match each deposit to a line item on the bank statement.

Bank statements will list cash and electronic deposit separately. Deposits from different electronic sources (credit cards, Paypal, Zelle, wires, etc) will show up as separate deposits on the bank statement. It will also try to include a description (although it’s sometimes a bit vague) of the deposit.

4. Reconcile checks

Reconciling checks is the easiest step in a bank reconciliation. Your bank statement will list each check in numerical order. For each check that appears on the bank statement, you cross off the check number in your accounting software or spreadsheet.

Once you’ve checked off all the cleared checks in your accounting software, you can verify the total amount of checks paid.

5. Reconcile any electronic payments

Though most companies are diligent about recording checks written to vendors and employees, electronic payments are more often overlooked within the company’s records.

Electronic payments include ACH payments, merchant fees, bank fees, and interest payments. If any of these payments have not been recorded, they should be recorded during the bank reconciliation process. 

6. Compare the cleared balance to the bank balance

Once you’ve checked off all the cleared checks, electronic payments, and deposits, you will have calculated a cleared balance for your books. This balance should match the bank statement at the end of the reconciliation period. If the balances don’t match, you’ll need to go back and investigate the source of the discrepancy. If the balances match, you’ve completed your reconciliation.

To make it even easier, we created a free bank reconciliation template here

How to use a bank reconciliation template

First, to edit this bank reconciliation Google Sheet, you’ll need to go to “File”, then “Make a copy”. You’ll be able to edit the copy for your purposes. 

The bank reconciliation template has three tabs. 

  • Template – This shows you how to use the template. It has the instructions and explanation for each row of the bank reconciliation.
  • Bank Rec – This tab includes an example of bank reconciliation to show you how to reconcile a bank account. 
  • Checks – In this tab, you can track checks written during the period of time you are tracking.

Update dates and balances

To get started, update the dates for the period you are reconciling. For simplicity, we’ll use the month of January 2021 as an example. 

Start by inputting the bank balance as of December 31, 2020, into Cell B5 and Cell C5. Take the ending bank balance and put the figure in C9. 

Continue grabbing numbers from the bank statement for the deposits (input into B6), checks that cleared the bank (input into B7), and other transactions such as electronic withdrawals (input into B8). Once you’ve entered these numbers, the template should calculate the ending bank balance in Cell B9. The calculated value in B9 should match the ending bank balance you input directly from the bank in C9. If these figures don’t match, go back and review the inputs in B5-B8.

Review your deposits

The next step is to review the deposits in your books. Identify any deposits in January 2021 that your bank has not received. This might include check payments or electronic deposits that are in pending status as of January 31, 2021. Total these payments and put the value in B10. 

It often takes vendors a while to cash checks. You should have a list of checks written prior to January 31, 2021, and note which ones have not been cashed. (See the Checks tab of the workbook for an example of how to track this.) The total of these outstanding checks should be entered in C11. 

In B12, you’ll want to identify any other pending transactions. These may include debit and ACH payments that are in pending status as of January 31, 2021. 

After you’ve entered these figures, calculate the cash available in B13. These are the funds in your bank that are free for your company to spend.

How to record bank reconciliations

In your accounting software, each bank transaction should show up as “cleared” once the bank processes it. In electronic systems, once you’ve processed a bank rec in the system, a “cleared” tag will appear. For manual systems, you will have to manually identify the cleared transactions. See the Checks tab for an example of how to track cleared checks.

A journal entry

You may need to make journal entries to record missing transactions that are in your bank account but recorded (yet) on your books. A common example is the interest payment from the bank each month. You won’t know exactly how much interest the bank has paid you until you have your statement. As a result, you should record the interest income during the bank reconciliation process. 

If your bank paid you $3.64 of interest in the month of January 2021, you would make the following entry:

1/31/2021 Debit Credit
Cash in Bank $3.64
Interest Income $3.64

Other common entries made during the reconciliation process are electronic payments, deposit adjustments, and bank fees.

A bank reconciliation statement

When you complete the bank reconciliation process, you’ll create a statement. 

A bank reconciliation statement is a summary of the reconciliation. It will highlight the reasons for any discrepancies between the bank balance and the cash balance in the accounting system. 

A bank reconciliation statement may include:

  • Bank balance – The balance provided on the bank statement will be noted, along with the date of that balance.
  • Additions and deductions – Any deposits in transit or checks going out that have not yet reached the bank will be noted on the statement and adjusted from the bank statement balance. 
  • Bank activities – Events that occurred on the bank side and that have not yet been accounted for in the company’s books will also be shown on the reconciliation statement. Bank fees and charges that you owe the bank should come out of the account. 
  • Adjusted cash balance – This is where the bank reconciliation statement shows that the books are in order – the adjusted cash balances should match when all outstanding transactions have been included. 

Why is bank reconciliation important?

It’s easy to take bank reconciliation for granted and believe that your accounts are going to match up properly each time. Hopefully, most of the time, they do, but that’s not guaranteed

The bank reconciliation process spots issues that directly impact your business’s health and future. Examples of why your business needs bank reconciliation include: 

1. Fraud

Perhaps the most important reason to reconcile bank statements regularly is to track and prevent fraud. If you see a deposit in your accounting software, but it never lands in the bank, where did it go? 

You want to spot this kind of issue right away so you can look into it further. A legitimate, honest mistake may lead to a missing deposit—or someone could have stolen the money. 

2. Missing checks and vendor payments

For example, if you send a check to a vendor, you want to be sure that they received that check in an appropriate amount of time. If a check still hasn’t cleared your bank a couple of weeks after you sent it, follow up to confirm that the vendor received it. Without bank reconciliation, you would miss it and may receive a past-due notice from that vendor.

3. Bank errors and financial statements

Though the main purpose of reconciling your bank is to calculate the cash your business has available, it also gives you the opportunity to verify that the bank has not made any errors. Since most banking is done electronically and through computer systems, bank errors are rare, but not unheard of. 

Common bank errors include checks that clear for the wrong amount or incorrect deposits. 

By checking the bank activity each month, you can contact your financial institution in a timely manner when there is still an opportunity to correct the error.

4. Cash flow management

Running a small business means ensuring that your company has the funds to continue its operations. A bank reconciliation lets you calculate the cash available to cover expenses. Simply checking the bank does not give you the full picture. The balance may not include payments (and deposits) that the bank hasn’t processed yet.

There are many reasons why an accountant is important, and performing regular bank reconciliations is high on that list. 

Top tips for bank reconciliation

Before we wrap up this discussion, we’d like to pass on three quick tips to help make bank reconciliation a useful part of your accounting process. 

  • Do it regularly. You should do bank reconciliations at regular intervals. For most small businesses, that is going to mean once per month – but you can adjust this schedule based on your needs. 
  • Keep your books up to date. Performing a bank reconciliation will take much longer if you need to update your internal books from the previous month before you can compare those records to the bank statement. 
  • Take your time. If performing the reconciliation on your own, set aside enough time so you don’t need to rush through the task. Doing it quickly is going to greatly increase the chances of a mistake. 

Understanding the importance of bank reconciliation and making time in your schedule to complete this task are two different things. All the motivation in the world can’t magically open up time for you to spend going over bank statements and clearing up any issues. 

This is where Xendoo comes into the picture. Bank reconciliation is just one of our many bookkeeping services, so we can take this and more off of your plate each month. 

 

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How to Set Up Accounting for a New Business: A Full Guide

If you are reading this, then it probably means you’ve just launched or intend to start a new business in the near future. As you try to figure out which need to prioritize in your new venture, it is crucial that you first learn how to set up accounting for a new business.

While it might seem mundane, good accounting is integral to the success of any business. You may have the best managers and staff, but it’s impossible for your business to flourish without properly monitoring and managing your money.

An experienced accountant can help you get your business set up faster and create a system for accurate accounting that grows with your business. However, we know that money can be tight for new business owners. 

Learning the basics of accounting can help you better understand the inner workings of your new business. As you grow, it’s easier to outsource or delegate the responsibility to a professional, so you can focus on other parts of your business. 

If you are only just starting out and have no clue where to begin, this article is for you. We will take you through the essentials of setting up your accounting for a new business.

1. Separate personal and business finances

As any established business owner will tell you, you need to treat your business as a separate entity to yourself. This means separating your business and personal finances.

In fact, it is a legal requirement of LLCs and corporations to manage their business incomes in separate bank accounts. On the other hand, sole proprietors have a bit of leeway. They can use their personal accounts for business, but we strongly advise against it.

Here’s why:

  • It will make it easier to file taxes for your business (since they are separate from your personal accounts)
  • Your accountants and bookkeepers can monitor the account more freely
  • It protects your individual assets in case of lawsuits or bankruptcy
  • Having business financial records will increase chances of getting funding from investors or creditors
  • It makes it easier to monitor your business cash flow

Separating your business accounts go beyond setting up separate bank accounts. Here are some additional steps for new business. 

Establish your business officially

Before you can get your business a bank account, you’ll need to register it with the state. Your business needs a name and other personalized details for you to open an account.

Get a business bank account

Just like you would a personal account, you should open both a checking and savings account for your business. This way, your money can be kept in an organized manner.

The rule of thumb is to keep a majority of your revenue in the checking account and then a small portion in the savings account to cover such things as emergencies and taxes. It is recommended that you set aside and save at least 30% of your total income for taxes.

To open a business bank account, you’ll need a few details. They include:

  • Business name
  • Business license
  • Social security number
  • Employer identification number
  • Organizing documents

Get a business credit card

Getting a business credit card comes with its share of benefits, but mainly, it will help establish a credit rating for your business. With the right card at hand, you can even get travel points or back cash rebates each time you make a purchase.

Track business expenses

Other than preventing instances of petty theft, tracking your expenses can help save a ton of money in tax deductibles. If you are keen, you’ll find a plethora of small expenses within your business are tax-deductible, meaning you can claim them on your tax return. However, the condition is that you have records of the expense.

The IRS demands that you have with you any documentation proving income credits or deductions that appear on your tax return. A few fundamental documents you should make sure to keep include:

  • Credit card and bank statements
  • Bills
  • Receipts
  • Invoices
  • Canceled checks
  • Proof of payments  
  • Previous tax returns    
  • Financial statement from your bookkeeper      
  • W2 and 1099 forms

Now, as you may know, storing paper receipts can get a little messy. And while they can just as easily be stored in a shoebox, it is better to keep them in an organized manner to allow for easy tracking. You can store them in a file, organize them by date or alphabetical order, or use an expense tracking system.

Alternatively, you can take photos of the paper receipts and store them online using software like QuickBooks online. If they are electronic receipts, you can either leave them stored in your computer or online storage systems like Expensify.

2. Choose a bookkeeping system and accounting method

Before we get into accounting methods, it is important to know what bookkeeping entails and how it all fits in.

To break it down, bookkeeping is simply the day-to-day act of recording transactions in business and reconciling bank statements. Accounting, on the other hand, is a higher-level process. It involves closely examining how the company is progressing and using data obtained from bookkeeping to build financial statements.

How to record business transactions

There are a few methods you can use to manage your books.  

  • DIY (by hand) – If you choose to do the bookkeeping yourself, you can make the entries manually using software like Wave or QuickBooks. First-time business owners that start with Excel spreadsheets regret it, so we advise using cloud accounting software.    
  • Outsourcing – If you’d rather spend your time managing other aspects of your organization, you can leave it to a professional bookkeeper. This can be either a remote or part-time local bookkeeper.   
  • In-house – This is usually the most expensive option. If you have the funds, you may employ a full-time in-house accountant or bookkeeper and leave everything to them.

Choose an accounting method

Once you have decided on a suitable bookkeeping solution, the next step is to determine which accounting methods to use. In this case, there are two main types: cash method or accrual method.

If your business is receiving revenue of $5 million each year, you can use either one to track the flow of money in and out of your business.

  • Cash basis methodHere, expenses and revenues are recognized the moment they are actually paid or received to or by the business. It is the most commonly used accounting method by individuals to balance their books.
  • Accrual method – In accrual accounting, any income or expenses are recognized the moment the transaction happens, regardless of whether the cash has arrived or left the bank. You’ll need to track payables and receivables.

Now, of the two, new businesses are better off using accrual accounting. With accrual accounting, the transactions are recorded early on in the process. With this, the business can better track accounts receivable and accounts payable. Ultimately, you get a more realistic view of foreseeable future profits.

Also, once any business reaches the $5 million a year in revenue mark, it is legally required to use accrual accounting anyway. Therefore, if you use accrual accounting from the start, you won’t need to switch methods once your business grows.

Determine how you’ll be paid for your products or services

Unlike the olden days, where you could only get paid in cash, there are now a variety of payment systems that customers can use. This can either be online, in person, or using a point of sale or POS system.

  • Pos systems/in-person payments – POS or point of sales systems refer to payments made in person by customers at your store. An efficient system will accept payments and keep track of sales in the store. You can make use of various digital POS software that incorporate contactless payment options, mobile POS, and e-commerce capabilities.
  • POS payments only – If you’ll only be doing POS sales, you want to look for a POS system that will work with your cash register or a separate credit card reader. For this, you’ll have to open a merchant account that will act as an intermediary between your business bank account and the payment system.
  • Online payments only – if you’ll only be accepting online payments, you can use PayPal or Shopify if you are an online-based retailer.

Set up a payroll system

As your business grows, you might need to hire employees or contractors to assist run the business. In this case, you’ll have to establish a payroll processing system to handle payments.

For best results, you want a payroll system that automates most of the tasks and automatically dishes out the funds.

Also, as you add people to the payroll, it is important that you place them in the right category. Either as independent contractors or employees. Failure to do so might result in penalties from the IRS.

Determine tax obligations

Your tax obligations will depend on your business legal structure. For instance, if you are a sole proprietor, self-employed, partnership, or LLC, you can claim business income on your personal tax return.

On the other hand, corporations are taken as separate entities and are therefore taxed separately from the owners. Therefore, you will be taxed independently as an employee of the corporation.

If you are self-employed, you’ll need to withhold taxes from your income and then remit them to the government the same way an employer withholds taxes from their employee’s pay. If you owe upward of $1,000, you’ll have to pay estimated quarterly taxes(four times a year).

3. Set up an online accounting system

Once you’ve established the steps above, all that is left is to set up an online accounting system. The easiest way to do this is by using cloud accounting software such as QuickBooks. Usually, it will come with everything you’ll need to record, analyze and report your business transactions.

Can you do accounting on your own?

If you are only just starting out, this might all seem like a lot. You might be wondering: is it really possible to do accounting on your own?

Well, to answer the question, yes; it is entirely possible to do accounting on your own. How well you do it depends on the scale of the business and your depth of knowledge on the matter. As we saw, there are various online bookkeeping software options that can help record transactions and streamline various accounting processes.

Still, doing your own accounting has its downsides. It’s not only prone to errors but will also take time away from focusing on other business activities. To do it successfully, you’ll need to have an aptitude for numbers and a general understanding of basic accounting practices and business taxes.

4. Outsource your accounting

If your heart’s not in it, you’d be better off leaving it to a licensed Certified Public Accountant (CPA) or a professional virtual accounting team like Xendoo. We not only have the knowledge and accounting tools, but also the experience of navigating all the balance sheets, chart of accounts, complex sales tax regulations, and rules.

Xendoo will also help with such things as lease negotiations, ongoing tax reporting, cash and treasury management, and developing long-term strategic plans for your finances.

Every entrepreneur faces challenges when starting a business. To get your business off the ground, you are going to need all the help you can get. Hopefully, by following the steps above, you have one less thing to worry about.

Of course, you don’t have to carry the weight on your own. If you’d rather focus on other aspects of your business, Xendoo is here to assist. With years of experience managing books, our professional accounting team is more than ready to help with all your accounting, bookkeeping, or tax needs. So feel free to contact us today and chat with one of our agents.

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When You Need to Hire a Pro: Online Accounting Service for Small Business

Your business is growing (congrats!), but entering invoices, expenses, and paying bills take up far too much valuable headspace—it’s headspace that you need to focus on your offerings and your clients. It’s time to go beyond merely tracking the ins and outs of your books and to start focusing on accounting and the financial health of your growing business. Choosing an online accounting service for your small business is the best way to keep your books updated, in compliance, and thriving. An online accounting services team can quickly become an integral resource for your small business — providing so much more than just your monthly reports — you’ll receive a trusted partner that helps you focus on your goals.

You need a solid business plan

Every small business needs a solid business plan — something to help you navigate the short term and work towards success in the long run. An accountant can help you devise a solid business plan as you get started writing one or updating your existing plan. An online accounting services team can determine areas for growth within your small business by providing insight on cash flow patterns, inventory management, pricing, and business financing, as well as providing advice on property and equipment leasing and purchasing. They can help you prevent getting audited by the IRS by setting up your bookkeeping system right the first time and preparing and guiding you through an audit, if necessary. 

Online accounting services ultimately create financial forecasts to make better decisions in your business while working alongside you to create a business budget that will support your business goals. Xendoo’s online accounting service provides you with Quickbooks and Xero, plus end-to-end service with a U.S.-based financial team—bookkeeping, tax consulting, and tax filing all under one roof, available 24/7. Xendoo also helps small business owners with their personal filings, so you don’t have to worry about a thing.

You need to figure out the best legal structure for your SMB

One of the first steps when starting a small business is determining the best legal structure for the business. But it is no small task! There are a handful of options to choose from, and they can be incredibly confusing to sort through. An accountant can help you analyze each option and look into the things you must investigate before deciding. 

Together you can determine the impact it will have on your taxes, your personal liability, the cost, and problems that could arise if you need to dissolve the registered entity, among many other things. There are benefits and disadvantages to registering your business that you have to consider. Whether you register as an LLC, Corporation, Partnership, or as a Sole Proprietorship, an accountant can help you determine what’s best based on your current status, your financials, and your goals.

You’re spending too much time on your finances and not enough time on your business

Small business owners are notoriously time-starved—struggling with marketing and sales with employee management, bookkeeping, and so much more. Not to mention providing the goods and services they set out to deliver in the first place. Choosing to work with an online accountant like the team at Xendoo will instantly take some of the heaviest, most important work off your plate. Online accounting software keeps your books up to date and tax-ready, giving you the ability to forecast and make strategic decisions as needed.

Need to finalize your marketing budget? Need to quickly determine whether or not you can hire a new employee? In the past, you likely had to sit down with your books for hours to attempt to find an answer. With an online accounting team on your side, you can quickly access your up-to-date financials and have a sounding board to help you make big decisions.

When you need to deal with government red tape

This year has been so hard on small businesses. As the government continues to implement and propose new measures to help companies manage the economic consequences of the COVID-19 pandemic, you need to know how to account for the assistance. The accounting and financial reporting implications can vary depending on whether the assistance is considered a loan, a grant, or an income tax benefit, among others. 

With approvals and funding of Payroll Protection Program (PPP) loans ongoing, there will be key accounting considerations that a CPA or accountant can make sure you’re aware of, so you can continue to navigate the changes and make smart decisions for your business.

When you have been audited

Many businesses are required to have a financial statement audit or a review with the IRS at some point. An audit sounds daunting because it truly is! Managing an audit can unexpectedly pull you from your regularly scheduled business – sucking up time, energy, and money. When you’re audited, you need a CPA to perform the audit services and issue the IRS’s required reports. Your CPA will help you ensure everything is in order and save you time and expenses.

CPAs are considered fiduciaries with a legal duty and power to act on behalf of and in their clients’ best interest. It’s important to note that non-CPA accountants are not considered fiduciaries to their clients, meaning they cannot represent their clients before the IRS during an audit.

Buying, selling or growing your business

If you’re considering selling your business, an accountant acts as a financial advisor – helping to ascertain your material assets and liabilities: what you own, what you owe, and what will be included in the sale. Thanks to Xendoos online accounting support, you’ll have all your up-to-date records ready when you are.

More importantly, an accountant can generate a picture of your income over time and assign concrete value to the more fluid and variable aspects of your business: past earnings, cash flow, balance sheets, equity statements, and the company’s performance related to economic and market conditions at large, as well as any liabilities that may be lurking under the surface. That CPA tax expertise is also important. An accountant will utilize your online accounting software to organize, document, and verify your small business’s tax filings, as well as give you a sense of the other party’s tax status.

Xendoo can help you with online accounting services, taxation solutions, and so much more – and will become a trusted resource for your small business. With accurate, up-to-date records at your fingertips, Xendoo’s online accounting software for small businesses plus their dedicated team of financial advisors will allow you to grow your business, meet your goals, and spend more time focused on the reasons you started your small business in the first place.