Bank Reconciliation: Purpose, Example, Process

Regular reconciliation and review of financial records can help to identify and resolve errors promptly, reducing the risk of financial issues. Discrepancies between the balance sheet and the bank statement must be identified and resolved promptly. Failure to do so can lead to further errors and make it challenging to reconcile the accounts.

1. Therefore, it is better if the bank reconciliation is accurate, and there are no missing amounts.
2. If an employee tries to commit fraud at the beginning of the month, accountants reconciling the bank statement transactions won’t catch the discrepancy until a month later, sometimes longer.
3. Preparing a bank reconciliation requires a company to take a step by step approach.
4. Some people rely on accounting software or mobile apps to track financial transactions and reconcile banking activity.

Hence, at the end of each month, the first thing to do is to consult the bank reconciliation statement prepared at the end of the previous month. Similarly, some checks credited to the ledger account will probably not have been processed by the bank prior to the bank statement date. This is long after a majority of the transactions have already taken place, business has moved on, and the front office is already looking to the period ahead. Next, we look at how a bank uses debit and credit when referring to a company’s checking account transactions. Plan to complete reconciliations monthly so you don’t risk accumulating a large number of discrepancies, which could be difficult to track. If done regularly, a bank reconciliation easily helps you identify discrepancies so that you can adjust them.

A bank reconciliation is a key control for many companies when, on an ongoing basis, accounting teams take necessary steps to substantiate cash on the balance sheet. Bank reconciliations verify the integrity of data between the bank records and a company’s internal financial records. Great care is necessary to record each debit card transaction into the accounting records, and appropriate approval and documentation can be problematic. One of the most common cash control procedures is the bank reconciliation. In business, every bank statement should be promptly reconciled by a person not otherwise involved in the cash receipts and disbursements functions. The reconciliation is needed to identify errors, irregularities, and adjustments for the Cash account.

Simplify bank reconciliations with automated expense tracking

After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts. 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. Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement. 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.

During September, the company received $120,000 from sales and invoiced debtors $40,000 the previous month, and received a check that has not yet been reflected in the bank account. Auto-reconciling transactions reduces human errors such as keying inaccuracies and adds security to the reconciliation process. Solutions such as HighRadius’s cash management software can auto-reconcile transactions based on standard and user-defined tagging rules, saving time and reducing the risk of errors. If not, you’re most likely looking at an error in your books (or a bank error, which is less likely but possible).

Check if the bank deposits and withdrawals match the records on the balance sheet. If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source. To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another. More specifically, a bank https://www.kelleysbookkeeping.com/ reconciliation means balancing your bank statements with your bookkeeping. Before the reconciliation process, business should ensure that they have recorded all transactions up to the end of your bank statement. Businesses that use online banking service can download the bank statements for the regular reconciliation process rather than having to manually enter the information.

This process helps you monitor all of the cash inflows and outflows in your bank account. The reconciliation process also helps you identify fraud and other unauthorized cash transactions. As a result, it is critical for you to reconcile your bank account within a few days of receiving your bank statement.

It can also adjust the balances to the bank statement to reach the adjusted bank book balances instead. Preparing a bank reconciliation requires https://www.online-accounting.net/ a company to take a step by step approach. The easiest step by step approach to preparing bank reconciliation is through a 5-step process.

Make Necessary Adjustments in the Balance as per cash book

At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited. Next, check to see if all of the deposits listed in your records are present on your bank statement.

Bank reconciliation is the process of comparing accounting records to a bank statement to identify differences and make adjustments or corrections. In the case of personal bank accounts, like checking accounts, this is the process of comparing your monthly bank statement against your personal records to make sure they match. Many banks allow you to opt for fee-free electronic bank statements delivered to your email, but your bank may mail paper bank statements for a fee. The bank reconciliation (if prepared or reviewed by someone other than the person with access to the checking account) is a form of internal control over a company’s checking account balance. Basically, the bank reconciliation compares the amounts in a company’s accounting records with the amounts in its bank’s records. For smaller companies, it’s common to reconcile bank statements during the monthly or quarterly close process.

(b) Checks Nos. 789 and 791 for $5,890 and $920, respectively, do not appear on the bank statement, meaning these had not been presented for payment to the bank by 31 May. Banks often record other decreases or increases to accounts and notify the depositor by mailed notices. Due to the overwhelming paperwork that the financial department deals with, it’s possible that some invoices get misplaced or are never recorded. We offer reconciliation reports, discrepancy identification, and live accountants to work with for ease and confidence when closing your books. All of your bank and credit card transactions automatically sync to QuickBooks to help you seamlessly track your income & expenses.

Compare both adjusted balances

The company carries over the balance from its bank book to its trail balance and, subsequently, its financial statements. Therefore, the bank book is an important document in the accounting process of a company. Completing a bank https://www.quick-bookkeeping.net/ reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records. The process can help you correct errors, locate missing funds, and identify fraudulent activity.

Data Integration:

Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. Therefore, it makes sense to first record these items in the cash book to determine the adjusted balance of the cash book. If you want to prepare a bank reconciliation statement using either of these approaches, you can take balance as per the cash book or balance as per the passbook as your starting point.

From the following particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2021. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. 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. After adjusting all the above items what you get is the adjusted balance of the cash book. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits.

Ensure that the income and expenses on the balance sheet match the bank statements to identify any unaccounted expenses or deposits. In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time. Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned. NSF cheques are an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. Such deposits are not showcased in the bank statement on the reconciliation date.

They also can be done as frequently as statements are generated, such as daily or weekly. Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. For example, say ABC Holding Co. recorded an ending balance of $500,000 on its records. After careful investigation, ABC Holding found that a vendor’s check for $20,000 hadn’t been presented to the bank. It also missed two $25 fees for service charges and non-sufficient funds (NSF) checks during the month.