How to reconcile a bank statement to the general ledger?

The first goal for this reconciliation is to find what is on one side not on the other. Second goal is to have a real picture of how much should be in the bank if every transaction (payment or deposit) is cleared in the bank.

The bank statement might show more or less than the general ledger. The reconciliation will figure out the difference.

Any transaction is recorded in the general ledger but not in the bank will be called outstanding transaction. It can be outstanding payment or outstanding deposit.

There are 3 main steps.

Let's look at the steps:

First we need: the bank beginning balance and all transactions in that period, and the ending balance.

Second we need the Cash account in general ledger beginning balance, all transactions and ending.

Third, we need a list of all outstanding checks and deposits from prior periods to adjust it based on what's cleared and what's not cleared in this period.

Now, we need to see the general ledger transactions that were cleared in the bank. If there are 10 checks in the GL, nine are cleared, the 10th is considered outstanding check. If there are 4 deposits in the GL, 3 are cleared in the bank, the fourth is outstanding deposit.

Any fees or interest in the bank should also be recorded in the general ledger.

Here is the general ledger side:

Beginning Balance of Cash in GL

• 4 Deposits

• 10 Checks

• Bank Fees

=Ending Cash Balance

Then, we need to look at the bank statement. We need to look at the cleared checks and compare them to what's written in the current period and was written in prior periods. If there are 12 cleared checks, we know 9 are from the current period. The rest should be from the outstanding checks from the prior periods. When we find them, we need to adjust the outstanding list. If there is any payment in bank that's not in the general ledger at all, we need to investigate and find out the reason.

If it's a legitimate payment we will need to record it in the GL.

Also deposits, we have 5 deposits in the bank this period. 3 are from this period. 2 are not. They could be deposits made in the previous month but didn't clear in the bank till the following month. We also need to adjust the outstanding deposits and deduct them.

Also we need to look at fees deducted and interest added to make sure they are recorded in the bank. No deposit should be older than one month since deposits are made by the organization. A deposit made on the last day of month might take a few days to be cleared. Checks can be older than one month since they are cashed by the payee. You never know when the payee will cash a check.

Now we can do the reconciliation to the bank statement.

Beginning Cash in Bank (from the previous recon)

• Deposits Cleared in the bank

• Checks cleared in the bank

• Outstanding Deposits

• Outstanding checks

• Bank Fees

= Ending Cash in Bank

Or it can look like:

Ending Balance on the Bank Statement

• Outstanding Checks (the last month list minus checks cleared in this period from prior periods + new checks from this period not cleared yet)

• Outstanding Deposits (the last month list minus deposits cleared in this period from prior periods + deposits made this period not cleared yet)

= Cash in Bank Balance

At the end the Cash balance in bank on the reconciliation should equal the Cash balance on the general on the reconciliation.

Most systems allow you to track the cleared transactions even on a daily basis, so you don't have to keep an external list.

Finally, this reconciliation gives the organization an idea of its financial standing. Also, it will find any fraudulent acts or mistakes made whether on the bank part or the employee's part. Many times bank accounts get hacked. Without monitoring and reconciling the bank account, it will keep happening.

I hope this helps to understand how the reconciliation works.

Nader Andrews, MBA, ATP