Bank reconciliation is an essential bookkeeping process that helps businesses ensure their accounting records match their actual bank activity. During reconciliation, you may discover transactions on your bank statement that have not yet been recorded in your accounting system. Bank fees and interest are two common examples. How to Record Bank Fees and Interest During Reconciliation
Knowing how to record bank fees and interest during reconciliation is important because these transactions can affect your business’s cash balance, expenses, income, and financial reports. If they are overlooked, your books may not reconcile correctly.
In this guide, we explain how to identify, record, and reconcile bank fees and interest, along with common mistakes to avoid and best practices for accurate bookkeeping.
What Is Bank Reconciliation?
Bank reconciliation is the process of comparing your accounting records with your bank statement for a specific period. The purpose is to identify differences and determine whether they are caused by legitimate timing differences, missing transactions, or bookkeeping errors.
For example, your accounting software may show a particular balance, while your bank statement shows a slightly different amount. The difference could be caused by an outstanding payment, a deposit that has not cleared, a bank fee, or interest credited to the account.
Recording bank fees and interest correctly is an important part of completing the reconciliation process.
Why Do Bank Fees and Interest Matter?
Banks automatically process many transactions on behalf of their customers. Because these transactions may occur without the business owner manually recording them, they can sometimes be missed in the bookkeeping system.
Common bank fees include:
- Monthly account fees
- Transaction fees
- ATM fees
- Merchant service charges
- International transaction fees
- Foreign exchange charges
- Overdraft fees
- Loan-related bank charges
Bank interest can include interest earned on savings or deposit accounts. Depending on the type of business account, interest income may be received regularly or occasionally.
If these transactions appear on the bank statement but are missing from the accounting records, the account may not reconcile.
How to Record Bank Fees During Reconciliation
Step 1: Identify Bank Fees on the Statement
Begin by reviewing your bank statement for charges that have not already been recorded in your accounting system.
Look for descriptions such as service fee, account fee, transaction charge, merchant fee, or other bank-related expenses.
Check the date and amount of each charge carefully.
Step 2: Verify the Fee
Before recording a bank fee, confirm that the charge belongs to your business account and has not already been entered into your bookkeeping records.
This helps prevent duplicate transactions.
If the fee is unfamiliar, investigate it with your bank or review your account documentation before recording it.
Step 3: Record the Bank Fee as an Expense
In most bookkeeping systems, a standard bank service fee is recorded as a business expense.
For example, if your bank charges a $25 monthly account fee, you would record the $25 as a bank-related expense and reduce the bank account balance by the same amount.
The exact account category can depend on your chart of accounts and accounting practices.
Step 4: Match the Transaction During Reconciliation
Once the bank fee has been entered into your accounting system, match it to the corresponding transaction on your bank statement.
The transaction should then be included in the reconciliation and reflected in the adjusted book balance.
How to Record Interest During Reconciliation
Interest can work differently from bank fees because interest received by a business is generally recorded as income rather than an expense.
Step 1: Identify Interest on the Bank Statement
Review your bank statement for interest credits.
The description may include terms such as interest earned, credit interest, or interest payment.
Check the amount and date carefully.
Step 2: Confirm the Interest Has Not Already Been Recorded
Before entering the transaction, check your accounting system for an existing interest income entry.
If the interest was automatically imported through a bank feed, you may only need to categorise and reconcile it rather than create a new transaction.
Step 3: Record Interest as Income
Interest earned on a business bank account is generally recorded as interest income or another appropriate income category.
For example, if your business receives $50 in interest, record the $50 as income and increase the bank account balance by the corresponding amount.
The appropriate accounting treatment can vary depending on the nature of the interest and your accounting requirements.
Step 4: Match the Interest Transaction
After recording the interest, match it with the corresponding bank statement transaction.
This ensures that the amount is included in the bank reconciliation and that the accounting records reflect the actual bank activity.
Example: Recording Bank Fees and Interest
Suppose your business bank statement shows the following transactions:
- Monthly account fee: $20
- Interest received: $35
Your accounting records do not currently include either transaction.
The $20 bank fee should be recorded as an appropriate business expense, while the $35 interest payment should generally be recorded as interest income.
After entering both transactions, reconcile them against the corresponding bank statement entries.
The result is that the accounting records more accurately reflect the activity in the business bank account.
Common Mistakes When Recording Bank Fees and Interest
Recording Transactions Twice
One of the most common bookkeeping errors occurs when a transaction imported through a bank feed is manually entered again.
Always check whether the transaction already exists before creating a new entry.
Using the Wrong Account
Incorrect categorisation can affect financial reports.
For example, recording a bank fee as a general office expense may make it harder to track banking costs accurately.
Use the appropriate account based on your chart of accounts and bookkeeping practices.
Ignoring Small Bank Fees
Small charges can be easy to overlook, particularly when a business has many transactions.
However, even small fees can accumulate over time and cause reconciliation differences if they are not recorded.
Failing to Investigate Unknown Charges
Do not automatically categorise an unfamiliar bank transaction simply to make the reconciliation balance.
First determine what the transaction represents.
An unfamiliar transaction could be a legitimate fee, an automatic payment, an error, or potentially an unauthorised transaction.
How Accounting Software Can Help
Modern accounting software can simplify the process of recording bank fees and interest.
Bank feeds can automatically import transactions from your financial institution, allowing you to review and categorise them within your bookkeeping system.
Some systems can also learn how recurring transactions should be categorised, reducing manual data entry.
However, automation does not remove the need for review. Every imported transaction should be checked to ensure it has been categorised correctly and has not been duplicated.
Best Practices for Bank Reconciliation
To keep your bookkeeping accurate, consider these bank reconciliation best practices:
- Reconcile your bank accounts regularly.
- Review bank statements carefully.
- Record bank fees promptly.
- Record interest income promptly.
- Check for duplicate transactions.
- Investigate unfamiliar transactions.
- Use consistent account categories.
- Keep supporting documentation.
- Review reconciliation reports after completion.
Regular reconciliation makes it easier to identify missing fees and interest before they accumulate.
Final Thoughts
Knowing how to record bank fees and interest during reconciliation is an important part of maintaining accurate business bookkeeping. Bank fees generally need to be recorded as expenses, while interest earned on a business bank account is generally recorded as income, subject to the applicable accounting treatment.
During the bank reconciliation process, review your statement carefully for fees and interest that have not yet been entered into your accounting records. Verify each transaction, record it using the appropriate account, and match it to the bank statement.
By recording these transactions consistently and reconciling your accounts regularly, you can maintain more accurate financial records, reduce bookkeeping discrepancies, and gain a clearer picture of your business’s financial position.
