As we’ve talked about, a bank reconciliation statement compares a company’s accounting records with a bank statement in a given period. The goal is to ensure the transactions and ending balances on each match up. If not, transactions are carefully looked at to get to the bottom of discrepancies. The bank reconciliation is an internal document prepared by the company that owns the checking account. You must post the journal entries of all the adjustments made to the balance as per the cash book.
Since the bank statement balance according to the bank reconciliation matches the bank balance in the bank statement, the reconciliation can be considered correct. Preparing a bank reconciliation requires 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.
- On the other hand, the bank balance in the bank book of the company is $3,200.
- Any discrepancies lead to making necessary adjustments or corrections.
- As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book.
- For most companies, bank reconciliation should be prepared once a month.
- The reconciliation process also helps you identify fraud and other unauthorized cash transactions.
- NSF cheques are an item to be reconciled while preparing the bank reconciliation statement.
For example, if a check is altered, the payment made for that check will be larger than you anticipate. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money. 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 affect financial reporting and tax reporting.
If a company has more than one bank accounts, it will need to carry out the process for each account separately. On the other hand, deposits in transit are the opposite of outstanding checks. Deposit in transit refers to any checks that the company has received from another party, mostly customers. Deposits in transit are also checks that the company has presented to the bank, but the check did not clear before the preparation of the bank statement.
When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. The balance recorded in your books (again, the cash account) and the balance in your bank account will rarely ever be exactly the same, even if you keep meticulous books.
6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
So, if you’re reconciling for January, look at the last number on January 31st. That’s the number you’ll be starting with when you begin your process. If you reconcile every quarter, you’ll need the last three months’ statements.
- Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening.
- The differences are classified in one of these two categories based on which document, the bank book or the bank statement has the difference and the differences must be adjusted against.
- One important trait of the bank reconciliation is that it identifies transactions that have not been recorded by the company that are supposed to be recorded.
- 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.
It is helpful for a company to have a separate general ledger Cash account for each of its checking accounts. For instance, a company will have one Cash account for its main checking account, a second Cash account for its payroll checking account, and so on. For simplicity, our examples and discussion assume that the company has only one checking account with one general ledger account entitled Cash. Note that the transactions the company is aware of have already been recorded (journalized) in its records.
Example of Bank Reconciliation Statement
Match each line item from your accounting ledger to your bank statement. If there are any discrepancies, add the transactions of what’s missing. When you do a bank reconciliation, you first find the bank transactions that are responsible bookkeeping for massage therapists for your books and your bank account being out of sync. You only need to reconcile bank statements if you use the accrual method of accounting. This is to confirm that all uncleared bank transactions you recorded actually went through.
Required Information to Create a Bank Reconciliation Statement
Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. 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. If you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information. In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time.
This article will explain how to create various types of bank reconciliation statements. Uncleared checks are checks that have been sent out but have not cleared the bank yet, which can cause a discrepancy between your records and your bank statement. Generally, these transactions are either recorded on a spreadsheet or within your accounting software. You will use this bank statement to check the accuracy of your own business’ books.
Types of Differences
A business can have many different bank accounts in different banks and, therefore, will receive multiple statements from each bank for each account of the business. The bank statement, however, is prepared by the bank in which the account is held. The bank statement is sent to the business at the start of each month detailing all the transactions that took place in the account for the prior month.
This may occur if you were subject to any fees, like a monthly maintenance fee or overdraft fee. For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period. Go through all of the deposits in your bank account and make sure that each deposit on the bank statement has a matching entry within your accounting records. If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise!
One important trait of the bank reconciliation is that it identifies transactions that have not been recorded by the company that are supposed to be recorded. Journal entries are required to adjust the book balance to the correct balance. In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary. 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.
Adjust the bank book and bank statement balances
Accounting errors, such as missed or double payments, are not uncommon. Most businesses want to know of any issues before they cause embarrassing (or worse) situations. Bank reconciliations are usually prepared by the accounts payable department or finance department.
Adjusting Discrepancies Between Books and Bank
You’ll also want to look at any miscellaneous deposits that haven’t been accounted for. Once you locate these items, you’ll need to adjust your G/L balance to reflect them. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. 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.