Bank Reconciliation Definition & Example of Bank Reconciliation

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. You come to know about such deductions only when you receive the statement from the bank. Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet.

1. If a transaction isn’t showing on your bank statement, it’s most likely because you got income that you didn’t bank, or you paid for something out of a different account or with cash.
2. Bank reconciliation is the process of comparing accounting records to a bank statement to identify differences and make adjustments or corrections.
3. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank.
4. If you’ve been charged a fee in error, contact your bank to resolve the issue.
5. Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts.
6. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly.

In the case of personal bank accounts, like checking accounts, this is the process of comparing your monthly bank statement against your personal records to make sure they match. Many banks allow you to opt for fee-free electronic bank statements delivered to your email, but your bank may mail paper bank statements for a fee. A bank reconciliation is a critical tool for managing your cash balance. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement. This process helps you monitor all of the cash inflows and outflows in your bank account. The reconciliation process also helps you identify fraud and other unauthorized cash transactions.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. This transaction results in the bank’s assets decreasing by $1,000 and its liabilities decreasing by $1,000. For a more hands-off reconciliation experience, QuickBooks can help.

Bank Reconciling Statement: Adjusting Balance per cash Books

It won’t just be that you have more transactions to do, it will take longer per transaction because you’ll have a harder time recalling the details. All of your bank and credit card transactions automatically sync to QuickBooks to help you seamlessly how to do bank reconciliation track your income & expenses. There will be very few bank-only transactions to be aware of, and they’re often grouped together at the bottom of your bank statement. Therefore, you need to deduct the amount of these cheques from your bank balance.

However, as a business owner, it’s important to understand the reconciliation process. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook.

Understanding the Bank Reconciliation Statement

There are bank-only transactions that your company’s accounting records most likely don’t account for. These transactions include interest income, bank deposits, and bank fees. Sometimes your current bank account balance is not a true representation of cash available to you, especially if you have transactions that have not settled yet. If you’re not careful, your business checking account could be subject to overdraft fees.

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. The bank will debit your business account only when the bank pays these issued cheques. When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book. When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference.

Errors Made by Your Business or your Bank

Such a process determines the differences between the balances as per the cash book and bank passbook. Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records. This relatively straightforward and quick process provides a clear picture of your financial health.

In these cases, journal entries record any adjustment to the book’s balance. After fee and interest adjustments are made, the book balance should equal the ending balance of the bank account. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match. Completing a bank reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records. The process can help you correct errors, locate missing funds, and identify fraudulent activity.

Step 2. Compare Deposits

This can happen if you’re reconciling an account for the first time or if it wasn’t properly reconciled last month. 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. You first need to determine the underlying reasons responsible for the mismatch between balance as per cash book and passbook.

Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet. 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.

Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records. Remember that transactions that aren’t accounted for in your bank statement won’t be as obvious as bank-only transactions. This is where your accounting software can help you reconcile and keep track of outstanding checks and deposits. Most reconciliation modules allow you to check off outstanding checks and deposits listed on the bank statement.

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. 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. 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.

As a result, the balance as per the cash book differs from the passbook. 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. Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly.

As a result, it is critical for you to reconcile your bank account within a few days of receiving your bank statement. A bank reconciliation statement is a document that compares the https://simple-accounting.org/ cash balance on a company’s balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps identify whether accounting changes are needed.