A Guide to Everything You Need to Know About Bank Reconciliations

Therefore, you need to deduct the amount of these cheques from your bank balance. You will know about such information only when you receive the bank statement at the end of the month. Therefore, you record no entry in the business’ cash book for the above items.

The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. Therefore, when your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly.

The more frequently you reconcile your bank statements, the easier it is each time. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality. In a small business, that responsibility usually falls to the owner (or a bookkeeper, if you hire one. If you don’t have a bookkeeper, check out Bench). Automating bank reconciliation can bring numerous benefits to a business, including increased accuracy, productivity, and cost savings.

It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. Compare your personal transaction records to your most recent bank statement.

Bank reconciliation statements are effective tools for detecting fraud, theft, and loss. 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.

How can HighRadius Help You with Bank Reconciliation?

If there is an undocumented reconciling item, review the bank reconciliation process steps just noted. If there is still an undocumented variance, go back to the bank reconciliations for the preceding periods and see if the variance arose in a prior period. Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits. Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records.

  • Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
  • With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.
  • Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement.
  • Common errors include entering an incorrect amount or omitting an amount from the bank statement.
  • If an error is identified during the reconciliation process, it’s not always at the company’s end.
  • As a result, Community Bank’s balance sheet will report an additional $10,000 in assets and an additional $10,000 in liabilities.

However, if discrepancies are discovered when reconciling the bank account, it’s important to investigate and find out where the money went. It could be that a cheque never cleared or was cashed illegally, for example. Comparing deposits during a bank reconciliation is crucial to maintain financial accuracy and prevent potential overdrawn accounts. This process helps to ensure all recorded transactions match your bank statement. Ultimately, the ending balance of a bank account should equal the balance on the bank reconciliation statement (BRS). The BRS is a document that compares the cash balance of a business’ balance sheet to the bank statement’s corresponding amount.

Bank Reconciliation Record Keeping

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. Next, check to see if all of the deposits listed in your records are present on your bank statement. If the bank didn’t receive a deposit, investigate why it’s missing. Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees.

Since the deposits in transit are not yet recorded in the bank’s records, the company’s bank reconciliation will show the deposits in transit as an addition to the bank statement balance. A bank reconciliation compares the cash account from your business’s general ledger to the ending balance on the bank statement for the same time period. When you perform a bank reconciliation, you are ensuring your business records have captured all cash transactions accurately.

Example of a Bank Reconciliation Statement

This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate. A bank reconciliation should be completed at regular intervals for all bank accounts, to ensure that a company’s cash records are correct. Otherwise, it may find that cash balances are much lower than expected, resulting in bounced checks or overdraft fees.

Sample Format of a Bank Reconciliation.

However, there may be a situation where the bank credits your business account only when the cheques are actually realised. When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book. Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited. Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly. Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books.

For instance, if according to your records, your current balance is $5000 and your bank statement similarly shows $5000, your bank account is considered reconciled. But, if there’s a mismatch, say your records show $5000 while the bank statement indicates $5500, the account is unreconciled, and you must identify the error and correct it. Regularly reconciling keeps your cash records accurate and can also detect any fraud or money manipulation activities.

Some differences in timing are normal and expected, such as deposits in transit and outstanding checks. Deposits in transit are amounts received by your business and recorded in your books that haven’t yet been recorded by the bank. Outstanding checks have been issued by your business but haven’t cleared the bank yet.

If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened. Here are two examples to reinforce the bank’s use of debit and credit with regards to its customers’ checking accounts. Another possibility that may be causing problems how to obtain a copy of your tax return is that the dates covered by the bank statement have changed, so that some items are included or excluded. This situation should only arise if someone at the company requested the bank to alter the closing date for the company’s bank account. After you have matched all records and made the necessary adjustments, you will have to confirm that the end balances are the same.

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