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

how to prepare a bank reconciliation

Here are two examples to reinforce the bank’s use of debit and credit with regards to its customers’ checking accounts. When it comes to optimizing accounts payable management, reconciling your bank account is critical to staying on track. If you don’t ensure the business and bank are on the same page, tiny mistakes can snowball into huge problems. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. The more frequently you reconcile your bank statements, the easier it is each time. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality.

  1. Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences.
  2. The frequency of reconciling bank statements depends on the size and complexity of the business and its transaction volume.
  3. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.
  4. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book.
  5. Unrecorded items are different from timing differences as the company needs to record these differences in its bank book as well.

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. Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records.

If these balances are different, then the company must prepare a bank reconciliation statement. If the balances match, which is rare but still possible, a bank reconciliation statement is not needed. A bank reconciliation statement is a document that compares the bank book balance of a company with its bank statement balance.

Ensure that all checks recorded match the bank’s clearance list. If not, contact the bank immediately and inform them of the error. Bank reconciliation is a subset of the monthly, quarterly, and yearly close process and is not generally done on its own. Accountants spend a lot of time on this step to ensure the checks are thorough and even minute errors are spotted.

Example of Bank Reconciliation Statement

This is to confirm that all uncleared bank transactions you recorded actually went through. Check if the bank deposits and withdrawals match the records on the balance sheet. If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source. If the mistake is on the bank’s end, contact the bank and inform them. 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.

how to prepare a bank reconciliation

If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits. Once the journal entries are recorded, the general ledger is prepared. But, you will record such transactions only in your business’ cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook.

How Do You Reconcile a Bank Statement?

Bank statements are useful in huge transactions and in making Income Tax Return (ITR) statements. If basic is not justified, unidentified problems arise with further documents. They might mistakenly interchange entries for two different account statements.

NSF cheques are an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. But this is not the case as the bank does not clear an NFS cheque.

This reduces your bank balance as reflected in your bank statement. It is important 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. If you’re interested in automating the bank reconciliation process, be sure to check out some accounting software options.

how to prepare a bank reconciliation

The bank reconciliation also provides a way to detect potential errors in the bank’s records. Bank reconciliation accounting is performed by the accounts payable department. It’s a means of comparing bank statements against a company’s personal records to spot any discrepancies, mistakes, cash manipulations, or fraudulent charges. Interest is automatically deposited into a bank account after a certain period of time. So the company’s accountant prepares an entry increasing the cash currently shown in the financial records. After adjustments are made, the book balance should equal the ending balance of the bank account.

Introduction and Importance of Bank Reconciliation Statement (BRS)

We use two documents to prepare our bank reconciliation statement. Our bank reconciliation calculator was designed to help you to reconcile your bank statement with your company’s accounts. If you are studying accounting or are new to business and need information on bank reconciliation, our bank reconciliation calculator is just the tool you need. Accounting software enables a business to perform bank reconciliations on a more frequent basis. Bank transactions are automatically imported, giving staff the ability to match and categorize a large number of transactions with just the click of a button. Prior to reconciliation, a company should make sure all transactions have been recorded up to the end of the bank statement.

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. Deposits in transit are also referred to as outstanding deposits. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same. In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary.

Therefore, the bank book is an important document in the accounting process of a company. After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month. This statement is used by auditors to perform the company’s year-end auditing. If the entries in your company’s accounts record and bank statement are the same, then you would find no reason to prepare a bank reconciliation statement. More often than not, a company’s bank statement contains entries that are not in its cash book.

Whether this is a smart decision depends on the volume of transactions and your level of patience. Automation can solve the problem of time-consuming manual reconciliation and reduce errors. Cross-checking the bank statement and balance sheet can be done without human intervention using software tools. Not recording all transactions in the accounting system can lead to discrepancies between the balance sheet and the bank statement, making it difficult to reconcile. Bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank. Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies.

Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column. 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. Remember, banks make mistakes, too, with transposition errors common. The business needs to identify the reasons for the discrepancy and reconcile the differences.

Document the Process

In simple words, to eradicate two different versions of the same document. 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.