How to Do a Bank Reconciliation: Step-By-Step 2024

Common errors include entering an incorrect amount or omitting an amount from the bank statement. Compare the cash account’s general ledger to the bank statement to spot the errors. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals. In this blog, we will introduce you to some real-life bank reconciliation examples as well as the major roadblocks faced by organizations while reconciling their bank statements.

Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors. Consider Emily, a financial accountant working for a well-known company.

  1. Companies can designate several individuals to handle certain aspects of bank reconciliation, and they can complete reconciliations in a variety of ways.
  2. 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.
  3. If you’re missing transactions in your personal records, add them and deduct the amount from your balance.
  4. The frequency of bank reconciliation can vary based on your business’ specific needs.
  5. Businesses can gain a variety of advantages from effective reconciliation processes.

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. Many choose to schedule reconciliation to take place prior to credit control meetings so the data is as up-to-date as can be.

Businesses can gain a variety of advantages from effective reconciliation processes. Without good reconciliation, it is difficult determining which expected payments haven’t been made. In addition to detecting fraud, cash book and bank reconciliation statements allow you to quickly identify any potential disruptions in your cash flow. A bank reconciliation statement can help you identify differences between your company’s bank and book balances. Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records.

A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud. Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences. Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can make the necessary corrections in your books of accounts to ensure accuracy. Reconciliation of bank statements is the process of comparing the transactions recorded in the company’s accounting records with the transactions listed on the bank statement.

While we adhere to strict
editorial integrity,
this post may contain references to products from our partners. The bottom line of both sides of the bank reconciliation must be the same amount. In other words, Adjusted balance per BANK must equal Adjusted balance per BOOKS.

Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Businesses maintain a cash book to record both bank transactions as well as cash transactions.

How do you prepare a bank reconciliation statement?

You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees. Since the adjustments to the balance per the BOOKS have not been recorded as of the date of the bank reconciliation, the company must record them in its general ledger accounts.

Sample of a Company’s Bank Reconciliation with Amounts

It can also save money by keeping a closer eye on the company’s finances and identifying any discrepancies or errors. Automating bank reconciliation can bring numerous benefits to a business, including increased accuracy, productivity, and cost savings. By using software tools to automate bank reconciliation, businesses can focus on other critical tasks and make informed business decisions based on accurate financial data. Automation can solve the problem of time-consuming manual reconciliation and reduce errors. Cross-checking the bank statement and balance sheet can be done without human intervention using software tools. By avoiding these common errors, businesses can ensure the accuracy of their financial records, make informed business decisions, and reduce the risk of financial issues.

Your All-Encompassing Guide to Bank Reconciliations

If you’re interested in automating the bank reconciliation process, be sure to check out some accounting software options. The first step in performing a bank reconciliation is to review the bank statement for any discrepancies or unidentified transactions. This includes reviewing all deposits, withdrawals, fees, and other bank charges made. Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account. This often happens when the checks are written in the last few days of the month.

The cash column in the cash book shows the available cash while the bank column shows the cash at the bank. The following are the necessary entries for the adjustments to the balance per BOOKS. We reference each entry as E, F, B, D, G, C, or K, as indicated on the right side of the bank reconciliation. Next, we will prepare a bank reconciliation for a hypothetical company by using transactions that are commonly encountered.

Step 2 of 3

Check your ledger’s recorded deposits, withdrawals and cleared checks against those listed on the bank statement. Everything listed on the bank statement should be included in your records and vice versa. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals bank reconciliation example at least monthly. 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. Compare your personal transaction records to your most recent bank statement.

The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. The entries in the statement stop being the cause of discrepancies after a few days. The bank reconciliation statement explains the difference between the balance in the company’s records and the balance in the bank’s records. Automating bank reconciliation can reduce the cost of processing and audit costs.

Example of a Bank Reconciliation Statement

In your ledger balance, be sure to account for deposits that have yet to clear, as well as checks you’ve written that have yet to be cleared by the bank. The end result is the adjusted cash balance, which ensures your ledger balance matches the bank statement balance. Before sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements.

Most business accounts are set up to run monthly, though some older accounts may have a mid-month end date. Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement. Also, deduct any penalties or fees the bank assessed that your ledger doesn’t list. The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable.

This balance exists when the deposits made by your business at your bank are more than the withdrawals. 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.