Bank Reconciliation: Purpose, Example, Process

how to do a bank reconciliation

Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. If left to build up for too long, errors and discrepancies can build up and may start to impact your business and cash flow. Consider how high your transaction volume is and find a reasonable medium that strikes a balance between being practical and taking over your time.

Final Check

The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match. You must post the journal entries of all the adjustments made to the balance as per the cash book. After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month.

Bank Reconciliation Statement Template

Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook. However, in the bank statement, such a balance is showcased as a debit balance and is known as the debit balance as per the passbook. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals.

how to do a bank reconciliation

Cheques Paid into the Bank But Not Yet Collected or Credited

how to do a bank reconciliation

Where there are discrepancies, companies can identify and correct the source of errors. Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records. This relatively straightforward and quick process provides a clear picture of your financial health.

The easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank. Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column. The deposit could have been received after the cutoff date for the monthly statement release. Depending on how you choose to receive notifications from your bank, you may receive email or text alerts for successful deposits into your account. Contact your bank to investigate further and find where the issue lies.

Once solved, be sure to adjust your records to reflect deposits as needed. Next, check to see if all of the deposits listed in your records are present on your bank statement. The https://www.online-accounting.net/ business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match.

Failing to review these reports regularly can lead to errors in the reconciliation process. Starting with an incorrect opening balance can lead to errors in the reconciliation process. It’s essential to ensure that bench accounting review and ratings the starting balance is accurate before beginning the reconciliation process. In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business.

These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process. Those payments are recorded in your G/L, but they have yet to hit the bank. You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t cleared.

  1. This credit card is not just good – it’s so exceptional that our experts use it personally.
  2. A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance.
  3. Consider performing this monthly task shortly after your bank statement arrives so you can manage any errors or improper transactions as quickly as possible.
  4. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared.

One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting. Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis. There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them.

In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one. Such cheques are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment. So, this means there is a time lag between the issue of cheques and its presentation to the bank. Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet.

It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. Bank reconciliation statements ensure that payments were processed and https://www.online-accounting.net/transposition-error-transposition-error-excellent/ cash collections were deposited into the bank. Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies. Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes.