What are the Steps in Bank Reconciliation?

Ever wondered why there is mismanagement in your financial status for running your limited company or why, as an individual, you are unable to manage your expenses and income? This indicates the need to reconcile your bank account and the record of financial transactions you have. This article discusses what are the steps in bank reconciliation and the importance of bank reconciliation in growing a business or managing your own financials.

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What are the Steps in Bank Reconciliation in the UK?

Bank reconciliation is a bookkeeping process that involves the comparison of bank account data with the manual records available at the company office. This bookkeeping process allows the streamlining of the company’s capital assets, stock records, taxation, and corporation charges imposed by the government. This bookkeeping procedure is done at regular intervals to keep a well-maintained record of the company’s growth and assets from day one. Knowing what are the steps in bank reconciliation is important before starting the reconciliation procedure.

Why Do Entries on Bank Statements and the Company’s Accounting Register Differ?

The foremost reason for bank reconciliation is that there is often a difference between the company record and the bank record. This may arise due to:

1- Incorrect entries

Wrong entry by the company staff or bank staff; a chance of human error is always possible. No matter if you are using automated software for bank reconciliation or doing it through an accountant, a chance of making mistakes is always there. Going through every entry one by one and thoroughly checking the record at the end of the financial year helps rectify this error. These errors can create a big mess while filing a tax return for your company or as an individual at the end of the year.

2- Deposits in transit

There may be certain deposits by shareholders or the company that are yet uncleared in the bank record. They may be entered in the debit column, creating confusion and misalignment in the entries. Before comparing the two records, make sure that all entries are clear and are not in transit at the time of the audit.

3- Outstanding checks

Outstanding cheques are those that are issued by the account holders or the company, but the bank has not processed them yet. This creates the need for careful consideration of outstanding cheques or bills at the company end or bank end while auditing at the end of the financial year.

4- Bank service fee

The bank statement also includes bank charges for each transaction or bank transfer, while these charges are missing from the company accounts register. The accountant must carefully check for bank fee charges and deduct them from the transaction entries so that the company accounts register matches the bank statement.

5- Interest income

The bank statement may show an increased balance than estimated for some accounts because there are some accounts that are benefitted in the form of interest by the bank. So, this should also be considered by the accountants or individuals while reconciling and filing tax returns. It may be that the company or individual must pay tax on that interest given by the bank.

6- Not sufficient funds (NSF) checks

It is the check that is returned to the depositor in case of insufficient balance in his account. In this case, the bank pays the customer from the check issuer‘s last credited bank check. In simple words, it is called the cheque is bounced.

Visit our more detailed guide on what is bank reconciliation, we have covered in-depth knowledge of bank reconciliation over there.

What are the Bank Reconciliation Steps?

This section explains what are the steps in the bank reconciliation procedure and why they are done.

On the company account register, compare each entry with the bank statement entries
Look for bank service charges.
Look for any wrong entry by bank staff or company staff.
Deduct fee charges from the bank statement. This is called adjusting the bank statement.
Look out for outstanding cheques.
Include the in-transit amounts while reconciling because in the company record the amount may be credited, but in the bank statement that amount is still pending.
At the end of the bank reconciliation, the final amount on both records should be the same.

The Bottom Line

Bank reconciliation is important to keep a check on company growth and indicate any fraudulent activities or illegal transactions made by company staff. The steps in the bank reconciliation procedure are simple but one needs to be vigilant while reconciling company accounts records and the bank statement. Important factors to keep in mind are outstanding cheques, in-transit deposits, and bank service charges. Each entry in both records should be matched, and at the end of reconciliation, both records should have the same amount of money as the balance.

Disclaimer: All the information provided in this article on what are the steps in bank reconciliation, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.