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

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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. Such errors are committed while recording the transactions in the cash book. As a result, the balance as per the cash book differs from the passbook. Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook. 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.

Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix. Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened. Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance. To do this, a reconciliation statement known as the bank reconciliation statement is prepared. Since the Adjusted balance per BANK of $1,719 is equal to Adjusted balance per BOOKS of $1,719, the bank statement of June 30 has been reconciled.

Not Sufficient Funds Cheques

Reconciling your bank statement used to involve using a checkbook ledger or a pen and paper, but modern technology—apps and accounting software—has provided easier and faster ways to get the job done. Regardless of how you do it, reconciling your bank account can be a priceless tool in your personal finance arsenal. When you do a bank reconciliation, you first find the bank transactions that are responsible for your books and your bank account being out of sync. When a company maintains more than one checking account, it must reconcile each account separately with the balance on the bank statement for that account. The depositor should also check carefully to see that the bank did not combine the transactions of the two accounts.

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 journal entry for a customer’s check that was returned due to insufficient funds will debit Accounts Receivable and will credit Cash. Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates. Suppose your adjusted balance per your books is $10,000, while the ending balance in your bank statement is $9,800. Compare the adjusted balance from your books with the ending balance shown on your bank statement.

  • ABC company deposited a check for $350 from a customer but it bounced.
  • The items on the bank reconciliation that require a journal entry are the items noted as adjustments to books.
  • Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly.
  • (Remember that our demand deposit with the bank is a liability to the bank, just as it is an asset to us, so the bank increases our account with a credit entry).

Outstanding checks are those issued by a depositor but not paid by the bank on which they are drawn. The party receiving the check may not have deposited it immediately. Once deposited, checks may take several days to clear the banking system. Determine the outstanding checks by comparing the check numbers that have cleared the bank with the check numbers issued by the company. Use check marks in the company’s record of checks issued to identify those checks returned by the bank.

Resources for Your Growing Business

This means that the bank balance of the company is greater than the balance reflected in its cash book. You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee. These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process. Most business owners receive a bank statement, either online or in the mail, at the end of the month. Most business accounts are set up to run monthly, though some older accounts may have a mid-month end date.

Check the bank debit and credit memos with the depositor’s books to see if they have already been recorded. Make journal entries for any items not already recorded in the company’s books. The Bank service charges journal entry is one of the journal entries for bank reconciliation.

Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes. 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. But, you will record such transactions only in your business’ cash book only when you receive the bank statement.

3: Preparing a Bank Reconciliation

This means the bank has made an adjustment to your account that has not been recorded in your G/L. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. The easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank. Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column. It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely.

For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. For the most part, how often you reconcile bank statements will depend on your volume of transactions.

The bank deducted $25 for this service, so the automatic deposit was for $1,565. The bank statement also includes a debit memorandum describing a $253 automatic withdrawal for a utility payment. On the bank reconciliation, add unrecorded automatic deposits to the company’s book balance, and subtract unrecorded automatic withdrawals.

To detect bank errors

Cash does not include postage stamps, IOUs, time CDs, or notes receivable. The previous entries are standard to ensure that the bank records are matching variance accounting to the financial records. These entries are necessary to update Feeter‛s general ledger cash account to reflect the adjustments made by the bank.

However, this interest income might not be recorded in your cash book until you actually receive a bank statement or notice. Suppose a customer issued a check of $200 to you by the end of the month, and although you recorded it in your books on the last day of the month, the bank cleared it in the subsequent month. You will need to adjust for these timing differences during the bank reconciliation process.

While it may be tempting to assume you have more money in the bank than you think, it’s a safe bet that the difference is checks and other payments made that have not yet hit the bank. The deposit could have been received after the cutoff date for the monthly statement release. Depending on how you choose to receive notifications from your bank, you may receive email or text alerts for successful deposits into your account. Contact your bank to investigate further and find where the issue lies. Once solved, be sure to adjust your records to reflect deposits as needed.

What Are Common Problems With Bank Reconciliations?

Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook. Those payments are recorded in your G/L, but they have yet to hit the bank. You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t cleared. It’s common for your bank statement to have a higher ending balance than your G/L account shows.