How Does Account Reconciliation Work?

By: Stephen L. Nelson, CPA

Balancing, or reconciling, your bank accounts represents an important financial management task. By regularly reconciling your records with those of the bank, you improve the accuracy of your bookkeeping, you assure that bank errors haven't been made, and you also reduce the chance that you aren't the victim of fraudulent transactions, such as those perpetrated by a forger.

The problem when reconciling bank accounts

But unfortunately, trying to reconcile a personal or corporation bank account with Microsoft Money can seem pretty daunting at times. On any given day, a comparison between what your records show is the balance in your bank account and what the bank's records show will yield a discrepancy. And reconciling a bank account simply explains the difference between your records and the bank's.

Locating Forgotten Transactions

In general, two factors explain the differences between the two sets of records: First, there are the transactions you haven't recorded but that have been recorded by the bank, such as transactions you've forgotten to record as well as transactions for items such as bank fees and interest that you won't know about until you see them on the bank statement. Second, there are the transactions you've recorded but that haven't yet been recorded by, or cleared, the bank.

The process of reconciling any account involves looking carefully at both factors. For example, typically your first step is to look for and then record any transactions you forgot or didn't know about before seeing the statement: cash machine transactions, forgotten checks, interest, and monthly service fees. (This step of looking for and then entering forgotten transactions can be particularly important if you're using Microsoft Money to manage a small business's finances--even a small corporation or small limited liability company can easily have hundreds of transactions a month in a bank account.)

Explaining Discrepancies Between Your Records and the Banks

Once you've done this, you then identify and total the transactions that you recorded but that haven't yet been recorded by the bank, such as outstanding checks and deposits in transit. The total of these transactions should explain the difference between your recorded balance-this is what Microsoft Money shows-and the bank's balance-this is what appears on the bank statement.

When the total uncleared transactions don't explain the difference between your records and the bank's, you need to repeat the two steps discussed in the preceding paragraphs. You've made a mistake in at least one of them.

Reconciling Corporation and Limited Liability Company Bank Accounts

If you're reconciling a bank account for a small business that includes more people than just the owner and his or her family, you probably want to add one more step to the basic account reconciliation program: You should consider the possibility of forgery and embezzlement and look for evidence of either crime as you reconcile.

Specifically, if you do see forgotten transactions, you should consider the possibility that you didn't forget the transaction. You should consider the possibility that some nefarious third person effected a transaction in a fraudulent manner (such as by forging a check).

Accounting
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Accounting