How to Do a Bank Reconciliation: Step-By-Step 2023

If there’s a discrepancy between your accounts and the bank’s records that you can’t explain any other way, it may be time to speak to someone at the bank. If the remaining difference is immaterial, it may be acceptable to record the difference in the company’s books, rather than spending time on additional investigation activities. Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting. 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. This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook.

• After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same.
• Discrepancies between the balance sheet and the bank statement must be identified and resolved promptly.
• However, due to the timing of transactions, the cash balance on a bank statement and within the cash balance of a balance sheet are frequently different.
• People across departments or within the same department may be involved in having to complete their own tasks before the sequential step can occur.
• However, with today’s online banking a company can prepare a bank reconciliation throughout the month (as well as at the end of the month).
• This is the entire reason why you’re performing this process in the first place.

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. 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.

Unless you are tracking your bank account balance on a daily basis, your business may not have recorded these transactions on its books prior to the reconciliation process. In accounting, a company’s cash includes the money in its checking account(s). To safeguard this critical and tempting asset, a company should establish internal controls over its cash. 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.

Direct Deposits into the Bank Account

Most of these software solutions – such as Xero, Cashbook and Blackline – integrate the business’ bank accounts and provide all the records and data in one place. They automatically receive data from the most recent bank statements the moment they become available. 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.

• 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.
• It is important to note that it takes a few days for the bank to clear the cheques.
• This means that the bank balance of the company is greater than the balance reflected in its cash book.
• 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.
• With a tool, you can reconcile accounts that are at high-risk for errors daily to avoid the domino effect of mistakes from snowballing out of control.

Or there may be a delay when transferring money from one account to another. Or you could have written a NSF check (not sufficient funds) and recorded the amount normally in your books, without realizing there wasn’t insufficient balance and the check bounced. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account, and plan how you collect and spend money accordingly. Any credit cards, PayPal accounts, or other accounts with business transactions should be reconciled. Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile. Not recording all transactions in the accounting system can lead to discrepancies between the balance sheet and the bank statement, making it difficult to reconcile.

Example of a Bank Reconciliation Statement

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. 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. Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. This makes the bank reconciliation process efficient and controllable.

In most business settings, the task of conducting bank reconciliations typically falls on the shoulders of the accounting department. These financial sleuths accept the essential a guide to financial leverage responsibility of matching transactions recorded in the company’s general ledger with the bank statements. When you look at your books, you want to know they reflect reality.

How To Do A Bank Reconciliation: Step By Step

Similarly, if customer payment checks on the balance sheet do not match bank records, a cross-check is necessary. In the past, it was common for a company to prepare the bank reconciliation after receiving the monthly bank statement and before issuing the company’s balance sheets. This allows the company to verify its checking account balance more frequently and to make any necessary corrections much sooner. It is also important for company’s who needs to manage their cash flows. It is often necessary to perform a bank reconciliation daily for businesses that have a high volume and value of transactions.

What are the 6 steps for bank reconciliation?

Using a pencil, match the deposits on the debit (left) side of your general ledger with the deposits on the credit (right) side of your bank statement. Once you are finished, match the transactions on the credit side of your general ledger with those on the debit side of your bank statment. It’s advisable to consult with a financial professional to advise on the appropriate journal entries for your bank reconciliation adjustments. They will ensure all is as it should be and no data is incorrect or missing.

There are no unrecorded Receipts (Cr.) but if they did exist, they would be debited to the bank book. The other side of the entries will be taken to their relevant accounts, for instance, bank charges account. The bank book of ABC Co. will be credited with the above amounts because they are all payments from the bank account. These are differences that exist in the bank statement but are not recorded in the bank book.

All deposits and withdrawals undertaken by the 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. By conducting bank reconciliations on a regular basis, you can detect fraud and rectify mistakes quickly. However, due to the timing of transactions, the cash balance on a bank statement and within the cash balance of a balance sheet are frequently different. The use of a bank reconciliation will tell you whether or not the difference is explainable or actually indicative of an issue. Companies across industries perform bank reconciliations to ensure the accuracy of their financial statements.

You should compare the deposits and withdrawals from the bank statement to the debits and credits in your cash account. Debits increase your cash account, like a deposit or income, and credits decrease your cash account, like a withdrawal or fee. You might want to try accrual accounting as one way of keeping track of your balance. A bank statement shows what transactions have taken place in a business’ bank account over the last month. At the same time, your business maintains its own financial records. By comparing your cash balance on your balance sheet to the amount on a bank statement, you’re able to ensure that transactions are a reflection of reality.

Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business. 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.