What is bank reconciliation?

Ross McGee
Ross McGee

Bank reconciliation probably doesn’t cross the minds of many people outside of accounting. However, it is part of their daily lives even if they don't know it. Every time a payment is made, it is very likely that accountants and reconciliation officers are working hard on bank reconciliations to check that funds are transferred correctly.

A guide to bank reconciliation

Bank reconciliation is a process that has been upholding financial activities for generations. However, this doesn’t mean that it is simple - sometimes financial teams can find bank reconciliation hard. In fact, it is multifaceted and crucial to get right. As such, understanding the fundamentals of bank reconciliation is essential. Read on to discover some key points about this foundational procedure:

Motives for performing a bank reconciliation

Nearly every organisation runs them, so why do they do bank reconciliations? To ensure accuracy, compliance, and readiness for tax filing. To stop mistakes, fraud, and overspending. Ultimately, as a way to verify that financial transactions add up, bank reconciliation is the perfect process to ensure that financial activity is regulated and conducted properly.

Despite being a process that looks backwards over past figures, bank reconciliation is also the launchpad for future initiatives. By ensuring that numbers are correct, organisations possess the data they require to forecast accurately. As a result, bank reconciliation is as much about ensuring that everything is in order now, as it is about safeguarding the future.

The bank reconciliation process

For bank reconciliation to take place, there are a few standard requirements. Firstly, two sets of data are needed. One is held by a bank (external) and the other by a company (internal). These two sources will then be cross-referenced against one another using various pieces of data.

Whilst this might sound simple, within this process there are a lot of details to contend with which are becoming increasingly numerous and complex due to the additional pieces of technology which facilitate payments. Furthermore, bank reconciliation is becoming a time-consuming procedure because the volume of payment transactions is also growing thanks to PSPs, mobile wallets, and other contemporary payment tools. Fortunately, the bank reconciliation process can now be automated through software.

Typical problems encountered during bank reconciliation

Ultimately, bank reconciliation requires two sets of data to match up. However, this is not always guaranteed, hence the need for bank reconciliation. It too has its own problems though. Here’s a list of common bank reconciliation challenges and how to overcome them:

  • Data gathering and formatting – every programme has its own way of formatting data, and they’re not always built in ways to share their intel readily. As a result, accessing and cleansing data to be easily reconciled is a cumbersome process. Rather than relying on manual exports and re-arranging data in Excel, choosing technology which facilitates APIs and possesses advanced ETL (extract, transform and load) capabilities is an excellent way to overcome this problem.
  • High volumes of data – reconciliation is an activity with no room for mistakes. It is therefore wise not to rush. However, when volumes of data are insurmountable and continue to pile up, time is of the essence to get reconciliation done. Unfortunately, with today’s high volume of transactions, timely reconciliation is impossible manually. Instead, automating reconciliation is the only way to get the job done in a matter of seconds.
  • Large amounts of factors – as mentioned above, financial data is becoming increasingly complex. This means there are more variables to cross-reference to ensure that data matches up. Once again, whilst this limits human capabilities, reconciliation is purposefully designed to handle unlimited variables.
  • Time zones – sending and receiving payments is now a global activity. As such, funds moving between different time zones is inevitable. Unfortunately, this too adds a level of complexity to bank reconciliation. For example, transactions will likely be recorded in one location with one timestamp, and another elsewhere. Also, many banks and their financial systems only operate according to business hours within their time zones. Consequently, reconciliation can be delayed due to different operating hours or national holidays.

    No matter how good someone might be at maths, wrapping their head around time zones is not the easiest, especially when dealing with many other figures. To overcome the challenge of calculating time zone differences when reconciling, back-office staff are best advised to work with reconciliation platforms which automatically “translate” timestamps to match. These tools can also operate 24/7 and therefore work through the night without any human intervention, circumventing the problem of operational activity not perfectly matching up across the globe.
  • Complicated cheques – cheques are typically a thing of the past these days, and for good reason – they can cause a lot of problems, from not being cashed to long processing times. To overcome cheque-related issues, bank reconciliation statements can clear things up. These are documents which detail why any discrepancies are present, which in time will resolve. Typically, these instances are caused by cheques.

Why carry out bank reconciliations?

At a basic level, bank reconciliation can be defined by its purpose to match a company’s set of data with that of a bank. However, through exercising it on a regular basis, it provides businesses with many other benefits, including:

Stopping fraud and unauthorised payments

Nowadays, money can change hands easier than ever before. Accountants therefore have to be extra vigilant for fraud and unauthorised payments. The only way to spot instances of this is through reconciliation. Fortunately, as bank statements are highly trusted sources, reconciling with them is always a good way to spot if something untoward is happening elsewhere. This could include employees claiming expenses they shouldn’t or a company card being hacked.

Preparing for tax filing

Whilst businesses don’t want to be scammed out of money by their own employees or fraudsters, governments feel the same way when collecting taxes that firms owe them. Understandably, the likes of HMRC therefore conduct scrupulous checks over corporate finances. To avoid causing conflict with tax collection agencies and potentially facing fines, businesses must therefore reconcile their finances prior to tax filing to ensure that the figures they present are accurate.

Assessing profitability

Monitoring health is as important for humans as it is for businesses. Since companies are fuelled by how much money they have in the bank, reconciliation is vital for firms to know their real-time cash position. Moreover, done at regular intervals, bank reconciliation can help firms assess their profitability per month, week, or even day. Such instances give businesses the insight to forecast how profitable they could be in the future, helping to attract investors.                                                                          

What are the steps of bank reconciliation?

As mentioned earlier, bank reconciliation is a process. Whilst a lot of focus is placed upon its output – whether numbers add up or if there are exceptions – there are many steps before then. Let's take a look at them one at a time to make sure that they are conducted with complete precision:

Acquire bank records

Depending on the nature and size of a business, they could have any number of bank accounts. Each one is as important as the other for firms to build a complete financial picture. They therefore all need to be sourced when reconciling, either via manual downloads as statements or being automatically sent to accounting software.

Collect company records

Collecting bank records is crucial, but only if company records are too. Financial teams in charge of reconciliation usually possess most figures, but sometimes other departments also have packets of relevant financial data. It is therefore the responsibility of finance teams to source information from their colleagues and their own various pieces of financial software which they use.

Decide where to begin

Reconciliation ensures that financial records are up-to-date. No transactions can therefore be missed. As such, from the point when a bank reconciliation was last done, the process should be commenced again to capture every un-reconciled transaction.

Examine bank deposits in detail

Bank statements are trustworthy sources. If deposits feature on them but not in a company’s accounts, income is likely missing from internal records. While bank statements can alert organisations to this discrepancy, they must identify what income is missing – a sale, a refund, interest gains, or something else.

Verify the revenue on your books

If corporate books list a supposed income, but it does not feature on a bank statement, there is a reason. For instance, a customer payment might have bounced. Whatever the reason might be, it must be investigated.

Assess your bank withdrawals

Banks will always have a definitive record of withdrawals. These should be reviewed to fill in any gaps which might be missing from internal records.

Verify your expenditures

Whatever expenses are logged internally must be reflected as a withdrawal on a bank statement. If this isn’t the case, it could be due to a payment pending to clear or a different payment method being used such as paper cash.

Finalise your balance

Having thoroughly cross-referenced deposits and withdrawals, both the balance on the bank’s statement and that on a company's internal records should match. However, sometimes a bank reconciliation statement will be required to ensure this if there are any irregularities. Once all these steps are completed, this marks the end of the reconciliation process and the point from which it should next begin.

Having set out the necessary steps for a basic bank reconciliation, it is clear that it is anything but a quick and easy process. This is especially true when considering the high volume of complex transactions which now exist today. That is why many companies now choose to do their bank reconciliation the easy way and not worry about the lengthy steps involved; with automated reconciliation software, the process is done for them.


What software tools are there for bank reconciliation?

Bank reconciliation is an incredibly time-consuming process prone to errors if done manually. That is why the likes of Aurum Solutions exist – to automate bank reconciliation in seconds. Aurum Solutions possesses over 600 APIs, enables custom matching rules and scales infinitely as transactions grow to automate the entire reconciliation process. As a result, it saves companies vast amounts of time and also provides them with invaluable data insights through real-time dashboards.

How do you do a bank reconciliation?

The best way to do a bank reconciliation accurately and quickly is with the assistance of automated, accurate bank reconciliation software. With platforms such as Aurum, not only are errors eliminated and high volumes of transactions reconciled in seconds, but real-time insights are provided too.

What is a bank reconciliation statement?

When reconciling, figures do not always add up when finalising a balance. If this is the case, answers are needed. This is where bank reconciliation statements become prevalent. They act as documents which state why irregularities exist at the point of reconciliation. It will often detail problems relating to timing such as payments waiting to clear.

How to do bank reconciliation manually?

Manual bank reconciliation is an antiquated process which few businesses still conduct. If they do, they will likely use Excel, which makes them prone to errors and time-consuming processes. As a result, more and more businesses are transitioning to automated reconciliation. Rather than having to extract statements from their banks, cleanse their data and reconcile thousands of transactions manually, automated reconciliation platforms like Aurum reconcile high volumes in seconds, notify exceptions for investigation and provide real-time data insights.

What is an example of bank reconciliation?

When a company last conducted their reconciliation, it had a closing balance of £500,000 in its books and bank statements. However, over the course of a month, they received £200,000 in sales and invoiced debtors £100,000, for which they received a cheque that is yet to be reflected in their bank account. Regarding outgoings, the company paid £120,000 for client services and £60,000 on salaries.

At the end of the month, their internal books will therefore show that they had a total income of £300,000 and total outgoings of £180,000. In contrast, due to the cheque, which is yet to clear, their bank statement will show that they had a total income of just £200,000 and outgoings of £180,000.  In this example, a bank reconciliation statement will therefore be required to complete the reconciliation process and outline why the £100,000 difference exists.

What types of bank reconciliation are there?

There are three types of bank reconciliation:

  • Internal reconciliation involves reconciling data from within a company, often between different departments.
  • External reconciliation involves reconciling data from within a company, and another company or a bank.
  • Aggregate reconciliation involves combining multiple accounts to compare a total against a single set of records.
Ross McGee
Ross McGee

Content and Community Marketing Manager

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Ross McGee is a marketing manager at Aurum Solutions who deep dives into financial processes, technology, and best practices to share insights that help finance professionals of all levels maximise their potential.

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