Bank reconciliation explained: What it is and how to do it

Bank reconciliation is an important step for keeping financial records straight in any business, whether big or small. Given that financial records can be prone to human error — 59% of accountants report making multiple mistakes each month¹ — regular reconciliation is essential for ensuring accuracy and consistency. By regularly checking the company’s financial records against bank statements, business owners can spot discrepancies, monitor cash flow, and catch any potential fraud. In this article, we'll explain what bank reconciliation is, why it's important, and provide a step-by-step guide on how to perform it effectively. We'll also explore how fintech platforms like Airwallex can simplify this process and help you track all your transaction records automatically, saving you the headache of manual reconciliation. Sign up for a free Airwallex account today.

What is bank reconciliation?

Bank reconciliation is the process of comparing your business’s financial records with the bank statements to ensure that the numbers match. This process helps identify any discrepancies between your records and the bank’s records, such as unrecorded transactions, bookkeeping errors, or fraudulent activities.

Here’s a simple example of a bank reconciliation statement of ABC Company. During the reconciliation process, the company identifies deposits that have not yet cleared the bank and outstanding checks that have been issued but not yet cashed. Furthermore, the bank has collected $1,000 on a receivable for the company and earned $20 in interest, while a bounced NSF check and a bank service charge need to be deducted. After accounting for these adjustments, ABC Company confirms its true cash balance is $5,400, ensuring its financial records are accurate and up-to-date.

It is important to reconcile your bank statements for the following reasons:

• Cash flow management: Ensures your financial records are accurate and up-to-date. Any discrepancies can be identified and addressed promptly, providing a clear picture of your cash flow for effective budgeting and financial planning. For businesses looking to streamline this process, you may use an expense management application to automate and simplify the reconciliation of expenses, helping maintain accurate records with minimal effort.

• Regulatory compliance: Keeps you compliant with auditing requirements and standards. A comprehensive record of business income and expenses is essential for accurate corporate tax returns.

• Fraud detection: Helps detect any unauthorised transactions or suspicious activities, allowing for timely investigations and protective measures to be put in place.

Businesses routinely prepare bank reconciliation statements to ensure that payments have been processed and withdrawals accurately recorded. This reconciliation statement serves as an important tool in financial management. By clearly outlining each discrepancy, it enables companies to identify errors or inconsistencies in their financial records effectively.

Some roles that commonly conduct bank reconciliation activities include:

• Accountants

• Bookkeepers

• Treasurers

• Internal auditors

• Finance managers

• Business owners

How to do bank reconciliation?

Bank reconciliation involves comparing your recorded transactions with the bank’s records to ensure that they match.

Here is a step-by-step guide to help you through the reconciliation:

1. Gather your bank records: Open your bank statement to see the list of transactions recorded by the bank. Alternatively, you can simply link your bank account with an accounting software, so your transaction data will be imported automatically and you can skip this step.

2. Gather your business records: Collect the financial records of your company. This can be found from your spreadsheet, or imported directly into your accounting software for Airwallex users.

3. Find your opening balance: Start your reconciliation with the transaction item where the balance of your company financial records last matches the balance of your bank account.

4. Match transactions: Match the transactions from your bank statement with those recorded in your accounting software. Your accounting software should allow you to check off transactions that match.

5. Identify discrepancies: Review any unmatched transactions. Investigate these discrepancies by cross-referencing each record with your internal documents. Common discrepancies include data entry errors, outstanding checks, or bank charges not recorded in your books – we'll talk more about these later.

6. Adjust for errors: Make the necessary adjustments or corrections in your accounting software to address any discrepancies you’ve identified. This could involve adding missing transactions or correcting erroneous entries.

7. Recalculate the balance: After making the adjustments, check the software's calculated balance against your bank statement balance again to ensure they match.

8. Finalise reconciliation: Once everything matches, confirm the reconciliation in your accounting software. This often includes saving the reconciled statements, which serves as a record for future audits.

9. Review Regularly: Schedule regular reconciliations, ideally monthly, to maintain accurate financial records and catch discrepancies more easily in the future.

Many banks in Singapore like OCBC and DBS, as well as digital banks and fintech providers like Airwallex offer bank feed integrations to replace manual data entries with automatically sync transaction data. Read our article to learn more about the benefits of a digital business bank account.

By integrating Airwallex's bank feed with your accounting software, you can save up to 4 hours a week or month that you'd otherwise spend manually uploading bank transactions. Moreover, it reduces errors from manual entry, giving you accurate and timely insights into your cash flow so you can confidently make financial forecasts. Sign up for a free Airwallex account today for a more seamless bank reconciliation process.

Types of bank reconciliation

Reconcile bank statement

Reconciling your bank statement involves comparing each transaction listed in your bank statement against your own records to identify any discrepancies, such as missing deposits or outstanding checks. The reconciliation is considered complete when both balances match, ensuring that your financial records accurately reflect your cash position.

Many businesses rely on various checklists and systems to save time and ensure accurate financial reporting. To help businesses streamline their bank reconciliation process, Airwallex offers an automated expense management solution that seamlessly integrates with accounting software like Xero and Quickbooks. This allows businesses to reconcile their bank accounts more quickly and efficiently, enabling finance teams to focus more on analysis and less on manual reconciliation tasks.

Read our article on the best corporate bank accounts in Singapore.

Reconcile nostro accounts

A nostro account is an account held by a bank at a foreign bank, holding funds in the currency of that country. It is mainly used to send money to international bank accounts, allowing businesses to conduct cross-border services and manage foreign exchanges more efficiently. Reconciling nostro accounts is similar to reconciling regular bank accounts, but with the added complexity of handling multiple currencies. 

An alternative to navigating the complexities of managing and reconciling a nostro account would be to tap on Airwallex’s wide global coverage and multi-currency capabilities. With Airwallex, businesses can accept and settle payments from international customers using Airwallex’s Global Accounts. In addition, for eCommerce payments, Airwallex’s payment gateway and payment link can accept payments in 180+ currencies including AUD, USD, and EUR. Simply embed Airwallex's Payment Link into your online invoice, and your customers can pay you using Visa, Mastercard, and 160+ local payment methods. Once they make a payment, Airwallex automatically matches the transaction to the right invoice in your accounting software, streamlining the entire reconciliation process.

Reconcile payroll accounts

Payroll expenses are one of the biggest costs for many businesses, many of which spend up to 30% of their revenue on salaries². Payroll reconciliation makes sure the amount you're about to pay your employees lines up with what's in your company books. This helps make sure you pay your team accurately and that you don’t overlook any payroll deductions or taxes. So it's a good idea to reconcile your payroll every pay period before handing out paychecks.

To review your payroll register, you should check for accuracy in:

• Employee hours worked. Remember to account for paid leave, unpaid leave, public holidays, and overtime.

• Pay rates. Check to make sure that they have been updated for employees who received a raise or a bonus.

• Deductions. Record taxes, health insurance, and retirement contributions.

Prepare a payroll journal entry or ledger entry to record your payroll. You can skip this step if you are using an accounting software like Xero or QuickBooks, which automatically creates the journal entries for you. Once you've completed the reconciliation process, you're ready to generate your employees' pay slips and distribute them on pay day. Connect your accounting software with Airwallex's bill pay, so you can easily approve payroll straight from your accounting software and pay your employees using funds from Airwallex.

Reconcile invoices

The process of invoice reconciliation involves comparing the invoices received from vendors with the purchase orders, delivery notes, and receiving reports recorded in a company's financial system to ensure that they're accurate. This is essential for preventing discrepancies, which could lead to overpayment or disputes with vendors. 

By integrating Airwallex with Xero, you can make bill payments directly within Xero with the click of a button. This streamlined process not only saves time, but also reduces the risks of errors by eliminating the need for manual invoice re-entry into both your accounting software and bank accounts whenever you make payments. 

Reconcile balance sheet

Balance sheet reconciliation is an important accounting process where businesses check and confirm the accuracy of a company's balance sheet accounts. This usually means comparing the balances listed on the balance sheet with those in the general ledger to spot any discrepancies. By looking over supporting documents like bank statements, invoices, and other financial records, businesses can catch errors or inconsistencies in their financial reporting. Doing regular balance sheet reconciliation not only helps keep financial statements accurate but also builds trust with stakeholders and investors.

Integrate Airwallex with your accounting software

1. Sign up for Airwallex: Create a free Airwallex account. Take 5 minutes to submit the required business documents and Know Your Customer (KYC) information.

2. Complete the KYB process: The Know Your Business (KYB) process ensures compliance and verifies the identity of your business. Submit basic financial information about your business, including estimates of the average transaction size and monthly transaction volume.

3. Integrate Airwallex with your accounting software for free: Once your account is activated, you can connect to Xero or NetSuite via "Connections" on the Airwallex dashboard. This lets Airwallex automatically send your transaction records straight to your accounting software, and automatically reconcile transactions every hour. So, every time you use Airwallex to pay your suppliers, it'll be recorded and reconciled without any extra effort.

How to adjust discrepancies between book balance and bank?

While doing bank reconciliation, you may run into discrepancies between your book balance and bank statements from time to time. Maybe a customer paid you and you forgot to record the transaction, or perhaps the bank debited your account for fees you weren’t aware of. Here are some common discrepancies to watch out for:

Outstanding checks

These are checks you've issued and sent to your vendor that haven't been cashed or deposited yet. To adjust for outstanding checks, simply deduct their value from your bank statement. Make sure to keep track of outstanding checks from past months until they clear.

Unrecorded deposits

Sometimes, when a business deposits cash or checks after banking hours or on weekends, the transaction won't be processed until the next business day. Because of this delay, these funds are considered "in transit" until the bank finishes processing them. To keep your bank statement accurate, remember to account for these deposits in transit by adding their amounts to your bank statement balance during reconciliation.

Bank errors

Mistakes can occur on the bank’s side, such as incorrect fees, wrong transaction amounts, or even double-posting of a transaction. This can be easily avoided by using automated bank feeds, which automatically imports your transaction data into your accounting software.

Recording errors

It's also possible for mistakes to occur in your own financial records. This may include incorrect transaction amounts or dates, missing transactions, or duplicate entries. To avoid these errors, simply use an expense management tool like the one offered by Airwallex and integrate your bank feed with your accounting software, so transactions are automatically recorded and reconciled. 

Bank fees

Banks often charge fees for various services, such as account maintenance fees, overdrafts, or wire transfers. These fees may not always be reflected in your financial records until the bank statement is received. Using Airwallex, you can avoid any set-up and monthly fees or hidden charges as the platform's transparent pricing model means you only pay for what you use.

Using Airwallex to simplify bank reconciliation

If your business still relies on manual data entry or experiences high FX rates when paying international bills, you can use Airwallex for a faster bank reconciliation process and save on international transfer fees. As an end-to-end financial management platform, Airwallex automatically records your transfer corporate card spending in real time, ensuring accuracy and consistency in expense tracking. By connecting your Airwallex account with accounting softwares, your transaction records will be automatically synced and matched with corresponding entries, minimising recording errors and the manual effort needed to reconcile bank statements.

The platform offers various integrations with accounting softwares such as Xero, NetSuite and QuickBooks, including:

• Bank feeds: This enables seamless synchronisation of transactions from your multi-currency Airwallex account to your accounting software, reducing manual entry errors and ensuring that your financial records are always up to date.

• Expense management: Businesses can easily import their chart of accounts, tax rates, and other relevant data straight into Airwallex’s Expense Mnagement, so they can code expenses directly within the platform.

• Bill pay: Airwallex simplifies the bill payment process by allowing businesses to approve and pay both domestic and international invoices directly from their accounting software.

• Payment links: Utilising payment links within invoices allows businesses to collect funds effortlessly. Once payment is made through these links, the transaction is automatically reconciled to the corresponding invoice, ensuring consistency between payments received and entries in the accounting software.

Conclusion

Reconciling your bank statements regularly is important since it ensures the accuracy of your financial records, keeps the accounts in good standing, and provides insights into the overall financial health of your business. However, it can be a rather tedious and time-consuming task to compare your book records and bank statements manually. Airwallex's expense management system helps businesses streamline this process by automatically tracking and recording the spending of different teams in one place. By integrating your Airwallex account with your accounting software, you can further speed things up using automatically generated match suggestions.

Related articles about expense management:

• Expense management software

• Open a business account

• Instant international business debit cards

Frequently asked questions

1. Is bank reconciliation hard? 

Bank reconciliation can be difficult, especially for businesses that handle a lot of transactions or those who don’t have solid record-keeping systems in place. But with the right tools, like Airwallex's expense management system, you can make bank reconciliation a lot faster and easier. Airwallex offers automated transaction recording and categorisation, as well as integrations with popular accounting software platforms like Xero, NetSuite and Quickbooks, eliminating the need for manual data entry and streamlining the whole reconciliation process.

2. Is bank reconciliation part of bookkeeping? 

Yes, bank reconciliation is an important part of bookkeeping. It compares the transactions recorded in a business's accounting records to those listed on their bank statements to ensure that the bookkeeping records are accurate. 

3. What are the common challenges businesses face during bank reconciliation?

When doing bank reconciliation, businesses may often find discrepancies between their recorded transactions and bank statements. Sometimes, there may also be missing info on company spending, which makes matching transactions even trickier. Businesses can use automated financial management platforms like Airwallex to minimise inefficiencies caused by manual processes. Airwallex enables businesses to track and categorise expenses in real-time. It also provides integrations with accounting software such as Xero, NetSuite and QuickBooks, which seamlessly imports  transaction data to recommend matches with corresponding entries in your accounts.

4. How often should businesses perform bank reconciliation? 

Businesses should ideally perform bank reconciliation on a monthly basis to ensure accuracy and consistency in their financial records. For companies with a high volume of transactions or have a high risk of fraud, more frequent reconciliations, such as weekly or bi-weekly, may be beneficial to maintain tighter control over cash flow and financial reporting.

5. How does Airwallex help in managing multi-currency transactions during reconciliation?

Airwallex offers multi-currency accounts with local bank details in 23+ currencies. This simplifies the reconciliation process, as businesses can easily track and match foreign transactions all in 1 global account without worrying about exchange rates calculations. 

6. What is the difference between bank reconciliation and financial reconciliation?

Bank reconciliation specifically focuses on aligning a business's internal financial records with its bank statements to ensure that all cash transactions are accurately reflected; whereas financial reconciliation is a broader process that involves verifying and aligning multiple financial records, including accounts receivable, accounts payable, and other financial statements. It ensures that all aspects of a company’s financial reporting are accurately captured and consistent across various financial documents.

Sources & references

1. https://www.gartner.com/en/newsroom/press-releases/2024-02-21-gartner-survey-shows-that-a-third-of-accountants-make-several-error-per-weeo-due-to-capacity-constraints

2. https://www.accountingtoday.com/news/accounting-software-market-to-reach-118b-by-2026

3. https://www.metrichq.org/finance/payroll-to-revenue-ratio/