Doing a bank reconciliation is fairly simple, but you need to be diligent in your efforts and avoid skipping steps to ensure the right checks and balances. 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). If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise!
Bank Reconciliation: Purpose, Example, and Process
Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors. 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.
- Performing immediate bank reconciliations for large cash amounts or suspicious transactions further increases your ability to catch fraud and error.
- This is due to the time delay that occurs between the depositing of cash or a cheque and the crediting of it into your account.
- The journals vary depending on the type of reconciling items, and typical examples are shown in our bank-reconciliation journal entries post.
- For the most part, how often you reconcile bank statements will depend on your volume of transactions.
How to Prepare Bank Reconciliation Statement
A bank reconciliation compares a company’s cash accounting statements against the cash it has in the bank. A bank reconciliation is used to detect any errors, catch discrepancies between the two, and provide an accurate picture of the company’s cash position that accounts for funds in transit. Using cloud accounting software, like Quickbooks, makes preparing a reconciliation statement easy. Because your bank account gets integrated with your cash short and over definition and meaning online accounting software, all your bank transactions will get updated automatically and each item will be matched with your books of accounts. The bank will debit your business account only when they’ve paid these issued checks, meaning there is a time delay between the issuing of checks and their presentation to the bank. These time delays are responsible for the differences that arise in your cash book balance and your passbook balance.
Challenges With Bank Reconciliations
Companies prepare bank reconciliation statements as a comprehensive accounting comparison tool. A company can ensure that all payments have been processed accurately by comparing their internal financial records against their bank account balance. Bank reconciliation statements are also important for alerting a company in case of fraud or error. To be effective, a bank reconciliation statement should include all transactions that impact a company’s financial accounts. Bank reconciliation is an important financial control process that helps ensure your financial records are accurate, and there are zero unexplained inconsistencies in your day-to-day transactions.
By comparing the two statements, Greg sees that there are $11,500 in checks for four orders of lawnmowers purchased near the end of the month. These checks are in transit, so they haven’t yet been deposited into the company’s bank account. He also finds $500 of bank service fees that hadn’t been included in his financial statement.
If you’re not careful, your business checking account could be subject to overdraft fees. An NSF (not sufficient funds) check is a check that has not been honored by the bank due to insufficient funds in the entity’s bank accounts. This means that the check amount has not been deposited in your bank account and hence needs to be deducted from your cash account records. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly.
Tips for Streamlining Your Bank Reconciliation Process
When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. One of the primary reasons this happens is due to the time delay in recording the transactions of either payments or receipts. The balance recorded in the passbook or the bank statement must match the balance reflected in the customer’s cash book. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. Check if the bank deposits and withdrawals match the records on the balance sheet.
Many companies may choose to do additional bank reconciliations in situations that involve large sums of money or that show unusual financial activity. This can include large payments and deposits or notifications of suspicious activity from your bank. In these situations, it’s a good idea to perform an immediate reconciliation.
The account holder is responsible for preparing a bank reconciliation to identify differences between the cash balance and the bank statements. 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. Discrepancies in bank reconciliations can arise from data processing errors or delays and unclear fees at the bank.