Bank Reconciliation: Purpose, Example, Process

A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud. We strongly recommend performing a bank reconciliation at least on a monthly basis to ensure the accuracy of your company’s cash records. In the past, it was common for a company to prepare the bank reconciliation after receiving the monthly bank statement and before issuing the company’s balance sheets. However, with today’s online banking a company can prepare a bank reconciliation throughout the month (as well as at the end of the month).

1. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book.
2. Regardless of how you do it, reconciling your bank account can be a priceless tool in your personal finance arsenal.
3. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank.
4. Your bank reconciliation form can be as simple or as detailed as you like.
5. After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts.
6. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money.

Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank. It is helpful for a company to have a separate general ledger Cash account for each of its checking accounts.

For example, your bank statement shows that your ending balance is $11,450, while your G/L balance according to your trial balance is $10,850. If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the issue. The next step is to adjust the cash balance in the business account. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. To do this, a reconciliation statement known as the bank reconciliation statement is prepared.

We offer reconciliation reports, discrepancy identification, and live accountants to work with for ease and confidence when closing your books. However, there can be situations where your business has overdrafts at the bank. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Mitch has more than a decade of experience as personal finance editor, writer and content strategist. Before joining Forbes Advisor, Mitch worked for several sites, including Bankrate, Investopedia, Interest, PrimeRates and FlexJobs.

Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences. A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance.

Step 3. Compare Withdrawals

Bank reconciliation statements ensure that payments were processed and 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 how to do bank reconciliation affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits.

Step 1. Choose Your Method for Reconciliation

It’s common for your bank statement to have a higher ending balance than your G/L account shows. While it may be tempting to assume you have more money in the bank than you think, it’s a safe bet that the difference is checks and other payments made that have not yet hit the bank. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days. This is probably the most important step in the entire bank reconciliation process.

If you run a current account and a credit card account, you’ll need both statements. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly.

Consider performing this monthly task shortly after your bank statement arrives so you can manage any errors or improper transactions as quickly as possible. Keeping accurate records of your bank transactions can help you determine your financial health and avoid costly fees. Using this simple process each month will help you uncover any differences between your records and what shows up on your bank statement. Bank reconciliation done through accounting software is easier and error-free.

For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account. Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account. This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. The goal is to get your ending bank balance and ending G/L balance to match.

Step 2. Compare Deposits

Compare your personal transaction records to your most recent bank statement. First, make sure that all of the deposits listed on your bank statement are recorded in your personal record. If not, add the missing deposits to your records and your total account balance. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits).

Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook. There are times when the bank may charge a fee for maintaining your account. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank https://simple-accounting.org/ from your account. At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc. 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.

If you’re finding withdrawals that aren’t listed on the bank statement, do some investigation. If it’s a missing check withdrawal, it’s possible that it hasn’t been cashed yet or wasn’t cashed by the statement deadline. How you choose to perform a bank reconciliation depends on how you track your money. Some people rely on accounting software or mobile apps to track financial transactions and reconcile banking activity. Others use a paper checkbook, and balance it each month, to keep a record of any written checks and other transactions.

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. This statement is used by auditors to perform the company’s year-end auditing. Interest is automatically deposited into a bank account after a certain period of time. So the company’s accountant prepares an entry increasing the cash currently shown in the financial records.