Understanding Bank Reconciliation Process & Example
Compare the balance sheet’s ending balance with the bank statement’s ending balance. The first step is to obtain a detailed statement from the bank, which includes information about checks cleared and rejected by the bank, transaction charges, and statement of purpose examples bank fees. Generally, the responsibility for performing a bank reconciliation falls on an individual designated as the “bookkeeper” or accountant within the company. It is important that this person has a thorough understanding of accounting principles and procedures to be able to perform the task accurately and efficiently. The items in the bank section show that the bank’s version does not agree with the books because a deposit had not been processed and the checks had not yet been canceled.
Example of a Bank Reconciliation Statement
If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source. Banks often issue payroll accounting final exam practice flashcards service charges for various services like wire transfers or account maintenance. To reconcile them, deduct any service fees from your book balance while adding any interest income. When he receives the bank statement for one of the business accounts, a checking account, he sees that it has an ending balance of $9,800 while the company’s book balance shows $10,500.
Leveraging Technology for Automation
However, sometimes there are differences between the two balances and so you’ll need to identify the underlying reasons for such differences. However, there can be situations where your business has overdrafts at the bank, which is when a bank account goes into the negative as a result of excess withdrawals. This means that the company’s bank balance is greater than the balance reflected in the cash book. All of your bank and credit card transactions automatically sync to QuickBooks to help you seamlessly 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.
As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. It is important to note that it takes a few days for the bank to clear the checks. This is especially common in cases where the check is deposited at a different bank branch than the one at which your account is maintained, which can lead to the difference between the balances.
- A deposit in transit is money that has been received and recorded in the cash book but has not yet been processed by the bank.
- Once you’ve completed the balance as per the bank, you’ll then need to work out the balance as per the cash book.
- It is essential for maintaining accurate business financial records, which helps in tax filing and gives an overall idea of the company’s finances.
- Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet.
- Generally speaking, bank reconciliations should be completed on a monthly basis to ensure accuracy and timely updates.
Common errors and how to avoid them
Reconciling bank statements with cash book balances helps your business know the underlying causes of these balance differences. Once the underlying cause of the difference between the cash book balance and the passbook business bookkeeping balance is determined, you can then make the necessary corrections in your books to ensure accuracy. The frequency of reconciling bank statements depends on the size and complexity of the business and its transaction volume. For larger companies with a high volume of transactions, it’s advisable to reconcile bank statements daily to ensure that any discrepancies or errors are promptly identified and corrected..
Adjusting Discrepancies Between Books and Bank
Ensure that the income and expenses on the balance sheet match the bank statements to identify any unaccounted expenses or deposits. It’s imperative to maintain detailed sets of records of the current reconciliation process and any adjustments made. Each step of the reconciliation process should be clearly recorded, including any discrepancies found and the actions taken to resolve them. This practice not only aids in internal reviews but also provides an audit trail. To adjust for uncleared checks during bank reconciliation, list all issued but uncleared checks, subtracting their total from your bank statement balance.
Reconciling your bank account should be done monthly to catch discrepancies early and keep financial records accurate. Businesses with high volume of transactions must reconcile their bank statements weekly or daily to manage cash flow efficiently. A bank reconciliation is part of the month-end close process, which includes reviewing the company’s balance sheet, income, bank statements, expenses, intercompany trades, and other information.
