How to Prepare a Bank Reconciliation: 8 Steps with Pictures

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. Now, while reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. All deposits and withdrawals undertaken by the which of the following is not a step in preparing a bank reconciliation? customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book. 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.

Example of a Bank Reconciliation Statement

Adjust your records to match the bank statement, considering deposits, withdrawals, fees, and errors. Cross-checking bank statements with the balance sheet at least once every month during the closing process is necessary. It helps identify discrepancies early and prevent errors from piling up. If the business has a high volume of transactions, reconciliations should be done more frequently. A bank reconciliation is part of the month-end close process, which includes reviewing the company’s balance sheet, income, bank statements, expenses, intercompany trades, and other information. It is essential for maintaining accurate business financial records, which helps in tax filing and gives an overall idea of the company’s finances.

Step #3: Work Out the Balance as Per Cash Book Side of the Bank Reconciliation Statement

Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting. Small business owners may find that sufficient funds from the previous month are not enough. You can earn our Bank Reconciliation Certificate of Achievement when you join PRO Plus.

Compare the adjusted balances

Most business accounts are set up to run monthly, though some older accounts may have a mid-month end date. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook. However, there may be a situation where the bank credits your business https://www.bookstime.com/ account only when the cheques are actually realised. Some reconciliations are necessary to ensure that cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement. The reconciliation statement allows the accountant to catch these errors each month.

Generally, you want to reconcile your bank accounts every time you receive a statement from your bank – typically, that’s monthly. This could be something as simple as a missed transaction or an incorrect amount being recorded. If any errors are found, it is important to contact the bank as soon as possible to have them corrected. Depending on the error, it may need to be corrected in the company’s internal register as well. This could include something as simple as a missed transaction or an incorrect amount being recorded. As was the case with outgoing funds, there may be times when these two do not line up perfectly.

• In this case, it is simply a matter of matching up the dates to ensure that all transactions have been accounted for.
• There are two main things that companies look for in a bank reconciliation.
• Debit memos reflect deductions for such items as service charges, NSF checks, safe-deposit box rent, and notes paid by the bank for the depositor.
• The deposit could have been received after the cutoff date for the monthly statement release.
• The Transaction Matching software utilizes AI to discover and configure matching rules, enabling automatic line-level transaction matching between different data sources.
• If you commonly make deposits into your account, you’ll want to compare your bank account deposit totals to those listed in your general ledger.

How Often Should You Reconcile Your Bank Account?

As mentioned above, the process of comparing your cash book details with the records of your business’ bank transactions as recorded by the bank is known as bank reconciliation. As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement. When an account is reconciled, the statement’s transactions should match the account holder’s records. For a checking account, it is important to factor in any outstanding checks or pending deposits.

• There could be transactions unaccounted for in your personal financial records because of a bank adjustment.
• Once you’ve gone through and matched each transaction, compare the final closing balance on the bank statement to your account.
• Therefore, the company must adjust these differences on the bank reconciliation statement.
• A deposit in transit is typically a day’s cash receipts recorded in the depositor’s books in one period but recorded as a deposit by the bank in the succeeding period.

Adjusting Journal Entries

Automating bank reconciliation can reduce the cost of processing and auditing. It can also save money by keeping a closer eye on the company’s finances and identifying any discrepancies or errors. 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. 10% of all occupational fraud cases in small businesses are due to bank account reconciliation errors.

Final check

• Note that Community Bank credits its liability account Customers’ Deposits (which includes the individual depositor’s checking account balance).
• To reconcile the differences in both balances, the company must prepare a bank reconciliation statement.
• The bank statement itemizes a company’s list of cash and other deposits made into the checking account of the business.
• Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook.
• By avoiding these common errors, you can ensure the accuracy of your organization’s financial records, make informed business decisions, and reduce the risk of financial issues.
• The most common deposit in transit is the cash receipts deposited on the last business day of the month.

After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts. Before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement. 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. Apart from fraud, bank reconciliation can also help a company detect errors.

The purpose behind preparing the bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. 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.