Last updated on January 11th, 2024 at 12:42 pm
Taking control of your finances is a powerful thing. It’s simple actions that add up, such as reconciling your bank statements each month. That may sound like a complicated task, but it just means comparing the bank’s records with your own and checking for any discrepancies.
You may not be the type of person who keeps track of money with software or financial apps, but you still want to ensure your money is where it should be. Checking your account balance regularly and doing a simple bank reconciliation can help you maximize your monthly earnings and reduce your risk of missed payments. To help you get started, our team at Remitly put together this guide to reconciling your cash account.
What is reconciling your bank statement?
Simply put, a bank statement reconciliation means comparing your accounting records with the amounts shown on your bank statement. For most people, that means comparing the activity in your checking account to the statement you get at the end of the month.
You might keep a paper checkbook with logs of all your transactions. Historically, this is how people have reconciled their bank statements.
In the 21st century, though, online banking has become more popular. In general, writing personal checks has become a less common, though still necessary, activity.
Many banks have made their records electronic and now update them constantly. While this is a neat feature, keeping your records to catch bank errors is still a good idea.
When comparing your records to the bank’s, look for any differences between the cash balances in your records and the ending balance on your account statement.
Your goal? To make sure that all payments have been processed, all deposits were successful, and no errors occurred.
What is a bank reconciliation?
A bank reconciliation is just another term for statement reconciliation. It’s when you compare the deposits and withdrawals the bank has on record to your personal records.
With business accounts, the bookkeeper or small business owner may prepare a monthly bank reconciliation statement that outlines discrepancies between the company’s cash records and the bank information for record-keeping purposes.
How to reconcile a bank statement in 5 steps
Taking just 10 to 15 minutes each month to reconcile your bank statement can make a big difference. Accounting software can help, but you probably don’t need it.
Once a month, compare your account statement with your actual transactions. If you save receipts, this process will be much quicker.
1. Confirm your biggest purchases.
If you have a lot of activity on your statement, start with your 10 largest purchases to make sure there are no errors. Ensure that the purchase amounts are correct on the bank records.
2. Ensure that all deposits are correct.
Remember, money coming in is just as important as money going out. Keep good records of checks and deposit slips to make sure that you have the correct amount of money in your account.
Make a note of any outstanding deposits that you don’t see credited to your account. In some cases, they may be deposits in transit that have yet to be entered. If they’re not, you should contact your bank about the missing deposits.
3. Make sure all outgoing payments are accurate.
Next, you’ll want to verify that the people to whom you wrote checks or made transfers actually got that money. From utility payments to your weekly grocery bill, ensure the numbers on your statement are correct.
If you have autopay on your bills, this is a good time to verify those payments went through and in the correct amounts.
People who write checks should also look to see if all outstanding checks have been deducted through the account. Identify uncleared checks and consider contacting the payee to find out if they received the payment.
4.Factor in interest and fees
Another important thing to note when reconciling your bank statement is interest and fees. Make a note of any interest income indicated on your bank statement for the month to ensure that it’s correct.
Also, look for bank charges. Many banks charge account service fees for things like bounced (NSF) checks, failing to meet a minimum balance requirement, and using ATMs outside their network. Contact your financial institution for clarification if you see any unfamiliar bank service fees.
5. Document your totals.
This is where your checkbook, balance sheet, or personal bank reconciliation statement comes in. Record your incoming and outgoing totals. This will be helpful when aiming to track your earnings and spending habits month-to-month. Double-check that the bank’s ending cash balance matches yours.
But why is it important to reconcile your bank statements?
As mentioned above, online banking has made it possible to collect and store information much more easily. As a result, many people no longer take the time to reconcile their monthly bank statements.
Nevertheless, keeping your cash account records using an old-fashioned checkbook, general ledger, balance sheet, journal entries, or a financial app is still a good idea.
Even with the rise of virtual banking, reconciling bank statements is a common practice for both large and small business owners. Having detailed financial records helps businesses make and stay within budgets. It also helps them find financial issues before they become huge problems.
Consumers find account reconciliation helpful for many of the same reasons. Reconciling your statements helps you track your cash flow by letting you see exactly where your money is going. While you can often do this with online and mobile banking, keeping records on your own encourages you to pay more attention and is a more effective tool for staying on budget.
You can also track the status of other items on your bank statements, like service charges and outstanding checks. If a charge shows up that you weren’t expecting or a check wasn’t cashed, it can help you clean up loose ends.
Below are some good reasons to be your own bookkeeper and reconcile your monthly bank statements.
1. Prevent an overdrawn balance.
When you look at your bank account balance online, it will only sometimes include what’s pending. Also, temporary charges can sometimes be confusing, making it look like you have more or less money in your account than you actually do.
Check the beginning cash balance against your known expenses, and make sure you know the true amount you have. You’ll want to factor in any recent withdrawals, uncleared checks, or deposits. This is where a paper checkbook or daily journal entries can really help.
Taking this step can prevent an overdrawn account because you’ll know if you truly have sufficient funds. If this has been an issue for you in the past, consider looking into an account with no overdraft fees.
2. Make sure you receive all the payments you are due.
Did you recently pay a bill online or by check, only to receive a second bill? It’s an experience as common as it is frustrating. When you go to correct the error with the company billing you, chances are their records will be wrong.
Your reconciliations and the statements show you all of your bank transactions, including recent bill payments. Through the bank reconciliation process, you might catch an error or be assured that you did pay that bill.
And once you can demonstrate that your records show payment, you’ve saved money and the possible hassle of an unjustified bill collection attempt by the company.
3. Avoid costly errors.
Though rare, banks can make mistakes. They can record transactions twice, enter them for the wrong amount, or not even record them at all. It’s also possible to experience errors with the companies you do business with.
For example, you may notice an accidental charge after you cancel memberships or subscriptions, which may take automatic withdrawals from your bank accounts. In other cases, there may be entry errors at storefronts that manually enter your total charge.
By reviewing your financial statements closely, you’ll catch these mistakes.
4. Understand all your bank fees.
Do you know all the bank service fees you pay? Checking your bank statement balance will help you understand the exact fees associated with your accounts. You might be able to leverage this knowledge to negotiate better rates from your bank.
5. Detect fraud and identity theft sooner.
Unfortunately, millions of people fall victim to fraud every year. Regularly reconciling your bank statements will help you notice any fraudulent charges. Thieves will typically charge a small debit amount to test, so look for unidentified charges of a few dollars. Catching this early can prevent you from dealing with more significant losses in the future.
Even if the initial charge is a big one, identifying early helps stop further damage, as it lets the bank or credit card company put a stop to future fraudulent charges.
How to get help reconciling bank statements
Bank reconciliations can be time-consuming, but as you can see, making sure that the bank statement shows the same information you’ve tracked during the month can have many benefits.
If you need help following the bank reconciliation procedure, your financial institution should be able to assist you. Whether you think your bank balance may need to be corrected, you spot an unfamiliar deposit recorded on your account, or you have questions about fees, a customer service representative should be able to assist you. Don’t hesitate to reach out with inquiries and concerns as needed.