What Is a Bank Reconciliation Statement, and How Is It Done?

With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank’s records. As beneficial as account reconciliations are, many companies aren’t able to dedicate the resources needed to do a complete reconciliation of all accounts every month. Additionally, the documentation approach takes time and is tedious when handled manually, often conflicting with pressures to close the books as quickly as possible.

In the absence of such a review, the company would’ve lost money due to a double-charge. You can earn our Bank Reconciliation Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium bank reconciliation materials. These include our visual tutorial, flashcards, cheat sheet, quick tests, quick test with coaching, and more. Business.org explains more about what bank reconciliation is, why (and how often) you should do it, and how to make bank reconciliation both fast and accurate.

Bank Reconciliation Record Keeping

These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. 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. Bank reconciliation statements are useful check-and-balance tools used to detect errors, omissions, and fraud in a financial account. Bank reconciliation is a simple and invaluable process to help manage cash flows. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly.

Businesses that follow a risk-based approach to reconciliation will reconcile certain accounts more frequently than others, based on their greater likelihood of error. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February). 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. Therefore, you need to deduct the amount of these cheques from your bank balance. At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties.

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This is probably the most important step in the entire bank reconciliation process. 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. However, the depositor/customer/company credits its Cash account to decrease its checking account balance. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits). 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).

• As beneficial as account reconciliations are, many companies aren’t able to dedicate the resources needed to do a complete reconciliation of all accounts every month.
• In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one.
• It gives a clear picture of what Bank is reflecting balance and what books of accounts are reflecting the bank balance.
• When an account is reconciled, the statement’s transactions should match the account holder’s records.
• 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.
• Compare the check numbers that have cleared the bank with the check numbers issued by the company to determine the outstanding checks.

When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. After adjusting all the above items, what you get is the adjusted balance as per the cash book. This means that the bank balance of the company is greater than the balance reflected in its cash book. 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.

The first step is to compare transactions in the internal register and the bank account to see if the payment and deposit transactions match in both records. Identify any transactions in the bank statement that are not backed peo services up by any evidence. Three common reconciliations are bank reconciliations and credit card reconciliations, both of which deal with cash, and reconciliations for balance-sheet accounts — assets, liabilities and equity.

We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you). When they draw money from your account to pay for a business expense, they could take more than they record on the books. Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook. When you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the cheque issued on November 30 is unlikely to be cashed by the bank. To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete.

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This tends to result in fewer audit adjustments at the end of the year, since most issues have already been found and corrected by the accounting staff. This may require going back a few months in order to find the issue, which is why reconciling each month is crucial. Businesses that do not conduct regular bank reconciliations are vulnerable to fraud, unapproved withdrawals, and bank errors. If left unaddressed, these issues can result in cash flow leaks, which can obstruct business operations and growth. Ideally, you should perform a bank reconciliation every time your bank sends you a statement. This is typically done monthly, but it can also be done weekly, or even daily (if you’re a huge company that deals with hundreds of transactions per day).

This is done to confirm every item is accounted for and the ending balances match. After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts. Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both sides mentioned at the bottom match. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account.

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Interest is automatically deposited into a bank account after a certain period of time. Thus, the accountant may need to prepare an entry that increases the cash currently shown in the financial records. After all adjustments are made to the books, the balance should equal the ending balance of the bank account. If the figures are equal, then a successful bank reconciliation statement has been prepared. 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.

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. 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. In addition to ensuring correct cash records, the bank reconciliation process also helps in keeping track of the occurrence of any form of fraud.

Where Do Non-Sufficient Funds (NSF) Checks Go on a Bank Reconciliation?

Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can make the necessary corrections in your books of accounts to ensure accuracy. Any differences are investigated, and corrective action is taken when appropriate. Then, go to the company’s ending cash balance and deduct from it any bank service fees, NSF checks and penalties, and add to it any interest earned. At the end of this process, the adjusted bank balance should equal the company’s ending adjusted cash balance. Hopefully, once you’ve dealt with deposits in transit, outstanding checks, interest payments, and bank fees, your bank statement and internal accounting records will match. Resolving the issue could mean paying a bill, depositing a check, or entering a forgotten transaction into your general ledger.

If the indirect method is used, then the cash flow from the operations section is already presented as a reconciliation of the three financial statements. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts. Or maybe you scheduled a rent payment and listed it in your chart of accounts as usual, but the notification that your payment bounced went to your spam folder. As a result, you didn’t notice the payment actually bounced until your end-of-the-month bank reconciliation. Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis.

How Reconciliation Works

It might happen that after providing a service or finishing a project, a client promises to send a check – so you debit cash, and then forget about their payment altogether. Even though your bookkeeping will show they paid, only through your bank reconciliation will you be able to notice that the client hasn’t sent any payment yet and that there’s a receivable pending. It can also happen that a client pays their dues, but you don’t receive a notification, or simply forget to journalize the transaction altogether. It’s also important to note that you only need to do a bank reconciliation if you’re using accrual accounting. If you’re using cash accounting, it means you record every transaction simultaneously with the bank, so there can’t be any miscalculations and thus no need for reconciliation.

A bank reconciliation is a process performed by a company to ensure that its records (check register, general ledger account, balance sheet, etc.) are correct. This is done by comparing the company’s recorded amounts with the amounts shown on the bank statement. When there are no unexplained differences, accountants state that the bank statement has been reconciled.