The Reconciliation Process

All you are really doing in the bank reconciliation is explaining the differences between the bank balance on the statement and the bank balance in your ledger. As discussed above, there may be valid reasons why there are differences. They are called timing differences. You know, for example, that outstanding checks and deposits will be reflected by the bank in the next period.

Before you begin the reconciliation process, you must make sure that all other items that have correctly gone through your bank account have been accounted for in the general journal. There are two ways you can do this. You can tick off or highlight each entry in the general ledger that matches with an item on the bank statement. In accounting circles, this is called "ticking and bopping." (Don't ask why. I didn't invent the terminology!)

A more efficient method is to perform a test reconciliation. You can look at your bank statement for the last few days of the year and see if you can identify checks or deposits that appear in your general journal but which don't appear on your statement. For example, if you wrote a batch of checks on October 31st and mailed them that day, you can bet that they will not appear on your October bank statement. There simply was not enough time for the check to have been delivered to your supplier, deposited by your supplier, and cleared through the bank's clearing system. In a test reconciliation, you would use these items that you know about to see if you can reconcile by including them in the calculation. If not, it's time to go back to ticking and bopping.

The format of a bank reconciliation is somewhat standard. Many bank statements will also have a reconciliation process on the back.

Notice the balance from the bank statement and tries to get to the balance in the ledger. You would first subtract the outstanding checks (because they are already subtracted in your ledger), then add on the outstanding deposits (because they are included in your ledger). You then add or subtract any bank errors that you now know are going to be fixed by the bank next month. This process should give you a balance that matches your ledger balance. If it doesn't, you have to go back to your ticking and bopping process to find out where you went wrong.

As long as you have been careful, you can ignore those items that are ticked off or highlighted. We know that these items match. It is only the items that are not highlighted that you need to examine.

There are two types of items that may not match off: those that are on the bank statement and not in the ledger, and those that are in the ledger and not on the bank statement.

Items on the bank statement that are not in the ledger

There will only ever be two categories of these entries: bank errors and bank entries that have not yet been accounted for. Bank errors will appear as a reconciling item on your bank reconciliation. Bank entries that you have not accounted for should be accounted for, and they can then be ticked off or highlighted with the corresponding bank statement entry. There should be no other items that are on your bank statement that are not in your ledger.

Items in your ledger that are not on your bank statement

There will only ever be two categories of these entries: bookkeeping errors and outstanding items (checks and deposits). You must correct bookkeeping errors before you start the reconciliation process. Outstanding items are accounted for in the reconciliation process.

What Happens If I Still Can't Reconcile?

Curse. Throw the ledger across the room. Have six beers. All of these things may temporarily make you feel better - I have tried all of these remedies and more! - but in the end, you still have to reconcile. Go back to the main purpose of what you are doing. You are looking at two lists of numbers and showing what the differences are.