Home Uncategorized How to Do a Bank Reconciliation: Step-By-Step Process

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

written by Barry and Joyce Vissell February 25, 2020

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. An outstanding cheque refers to a cheque payment that has been recorded in the books of accounts of the issuing company. But, the cheque has not yet been cleared by the bank as a deduction from the company’s cash balance. It is important https://quickbooks-payroll.org/ 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. In addition to ensuring correct cash records, the bank reconciliation process also helps in keeping track of the occurrence of any form of fraud. Such insights would help you as a business to control cash receipts and payments in a better way.

  1. It is essential for maintaining accurate business financial records, which helps in tax filing and getting an overall idea of the company’s finances.
  2. Organizations that embrace modern accounting solutions like account reconciliation software are actually able to reconcile transactions as they are happening, in real time.
  3. Expenses such as overdraft fees or monthly bank fees need to be deducted from your cash balance.
  4. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium bank reconciliation materials.
  5. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money.
  6. When the bank debits a depositor’s checking account, the depositor’s checking account balance and the bank’s liability to the customer/depositor are decreased.

The bank reconciliation process typically kicks off at the close of the period and after the bank statements have been received. Accountants will substantiate the transactions recorded in the general ledger by matching that data to the bank statements collected from the bank. 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. 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).

Identifying Accounting Errors

However, the depositor/customer/company debits its Cash account to increase its checking account balance. Bank Example 1 showed that the bank credits the depositor’s checking account to increase the depositor’s checking account balance (since this is part of the bank’s liability Customers’ Deposits). When the bank debits a depositor’s checking account, the depositor’s checking account balance and the bank’s liability to the customer/depositor are decreased. While expensing out the missing amount is an option, it is not the recommended approach.

It is also a good idea to mark any expenses that have already been included in the bank reconciliation statement to avoid any errors. Apart from fraud, bank reconciliation can also help a company detect errors. Performing regular bank reconciliation can help the company identify any issues within its internal processes related to bank transactions that may result in errors. It can, in turn, help the company improve its bank processes and make them more efficient and effective. Therefore, bank reconciliation can help the company identify any weaknesses within the banking transaction controls. If you’re interested in automating the bank reconciliation process, be sure to check out some accounting software options.

Duplicate payments

Bank reconciliation statements are tools companies and accountants use to detect errors, omissions, and fraud in a financial account. Bank reconciliation is a simple and invaluable process to help manage cash flows. Plan to complete reconciliations monthly so you don’t risk accumulating a large number of discrepancies, which could be difficult to track. If done regularly, a bank reconciliation easily helps you identify discrepancies so that you can adjust them. Companies face several challenges when reconciling bank statements to financial activities, so it’s important to highlight common problems you may encounter.

Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month, weekly and even at the end of each day by businesses that have a large number of transactions. To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business.

On the other hand, for companies with a low level of bank activity, not preparing bank reconciliations is also an option. The unrecorded differences may have other items as well, such as errors in the bank statement or bank book, dishonored checks, interest received, etc. Unrecorded differences may also include direct debits and standing orders that get automatically charged at a specific date. Similarly, they may consist of deposits that other parties deposit into the bank account without notifying the company.

If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank. Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document.

Example 1: Preparation of Bank Reconciliation Statement Without Adjusting the cash book Balance

Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank. After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again. Next, check to see if all of the deposits listed in your records are present on your bank statement.

Bank Reconciliation Procedure

This is especially common in cases where the cheque is deposited at a bank branch other than the one at which your account is maintained. However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque. This is because the current account on which the cheque is drawn does not have sufficient funds to honour the cheque. In today’s world, transactions (whether receipts or payments) are done via a bank.

These differences generally comprise two types of items, outstanding checks, and deposits in transits, also known as outstanding lodgments. An outstanding check is a check that a company pays another party, but the party does not present it to the bank. For example, a company pays its supplier through a check, but the supplier does not take it to the bank before the bank prepares the bank statement. 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. This process involves matching the amounts and dates of each transaction to ensure that they are consistent across both sets of records. A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance.

Not Reviewing Reconciliation Reports:

Read this blog next to learn more about how your F&A organization can achieve fully automated bank reconciliations. Modern accounting works to automate and centralize your reconciliation process, and ensures the following. At a minimum, the bank reconciliation should be done within a few days after the end of each month. However, with the bank’s electronic records readily accessible, the bank reconciliation should be done more frequently. It is helpful for a company to have a separate general ledger Cash account for each of its checking accounts.

Or if a debtor has paid you via check and you’ve credited the account, but the receivable isn’t reflected yet in the bank statement. (f) The cash book does not contain quickbooks hr services a record of bank charges, $70, raised on 31 May. The items therein should be compared to the new bank statement to check if these have since been cleared.

Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. Bank Reconciliation is the process of comparing your business’ books of accounts with your bank statements. It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts. If transactions on the bank statements are correct, you need to adjust your books. Great care is necessary to record each debit card transaction into the accounting records, and appropriate approval and documentation can be problematic.

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