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

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

Kevin Payne is a personal finance and travel writer who covers credit cards, banking, and other personal finance topics. In addition to Forbes, his work has been featured by Bankrate, Fox Business, Slick Deals, and more. He is the budgeting and family travel enthusiast behind Family Money Adventure. If you find any bank adjustments, record them in your personal records and adjust the balance accordingly.

  • This often happens when the checks are written in the last few days of the 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.
  • Bank reconciliation statements compare transactions from financial records with those on a bank statement.
  • A BRS checks entries on a monthly basis to avoid any future discrepancy.

Until then, your balance as per the cash book would differ from the balance as per the passbook. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals. 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. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly.

Why is it important to reconcile your bank statements

In this situation, you must reverse the original deposit entry, which was a credit to the cash account to reduce the cash balance, along with a debit (raise) in the accounts receivable account. To discover uncleared checks and deposits in transit, compare the company’s list of issued checks and deposits to the checks reflected on the bank statement. The bank statement contains the bank’s record of all transactions affecting the entity’s bank account throughout the previous month. 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.

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This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. 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. For example, say ABC Holding Co. recorded an ending balance of $500,000 on its records.

  • Basically, with the help of bank reconciliation, you will be able to compare two different records.
  • The bank reconciliation statement here compares the account balance of the bank with its internal financial records.
  • 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.
  • Therefore, you record no entry in the business’ cash book for the above items.
  • Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates.

Next, we look at how a bank uses debit and credit when referring to a company’s checking account transactions. Plan to complete reconciliations monthly so you don’t risk accumulating a large number of discrepancies, which could be difficult to track. If done regularly, a bank reconciliation easily helps you identify discrepancies so that you can adjust them. Companies face several challenges when reconciling bank statements to financial activities, so it’s important to highlight common problems you may encounter. Company XYZ has an opening balance of $100,000 in its book and bank statements for the beginning of September 2022. (c) A deposit of $5,000 received by the bank (and entered in the bank statement) on 28 May does not appear in the cash book.

Bank Reconciliation Process Flow

Next up, we will discuss why bank reconciliation is important and how this technique works. Then, we will share with you some of the steps with the help of which you will be able to do bank reconciliation easily. Hence, to learn more about this accounting technique, read on through to the end of the article. As a part of this process, you might require to prepare some journal entries to correct errors. These errors are those which interrupt during bank statement and general ledger comparison.

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The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book. Bank reconciliation statements are effective tools for detecting fraud, theft, and loss. For example, if a check is altered, the payment made for that check will be larger than you anticipate. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money. 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.

Why Is Bank Reconciliation Important?

They also can be done as frequently as statements are generated, such as daily or weekly. Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the Bank Reconciliation Statement is as necessary as a bank statement for a cash account. It records necessary changes mandatory to declare the bank statement and cash book records error-free and hence, required. Moreover, some random errors like noting wrong entries to the data, etc. might not be replaced. A bank reconciliation statement basically helps to find fraud or accidental discrepancies so as to prevent them.

Comparing Accounting: Bank vs. Company

First, make sure that all of the deposits listed on your bank statement are recorded in your personal record. If not, add the missing deposits to your records and your total account balance. Reconciliation records all the needful changes and helps in the smooth functioning of a firm. BRS is a statement which is prepared to reconcile the difference between cash balance and bank statement balance.

The main reason a business should reconcile its bank statements is because you need to ensure your cash balance on the balance sheet is accurate. Regular bank reconciliations also help prevent fraudulent or unauthorized transactions from going unnoticed. Bank reconciliation is the process of comparing accounting records to a bank statement to identify differences and make adjustments or corrections. In the case free online tax filing and e 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. In recent times, accounting software systems have become really popular with small businesses.

For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account. It is important to note that it takes a few days for the bank to clear the cheques. 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. However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment.

A bank reconciliation statement is a document that compares the 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. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. To do a bank reconciliation, first, you will need to match the cash balances on your balance sheet to the related amount on your bank statement. Apart from that, you will also need to evaluate the difference between the two so as to make changes to our accounting records, find discrepancies, and find fraudulent transactions, if any. With this technique, you are comparing the account balance your bank reported to your general ledger.

As a result, a difference of $2,500 is caused between the two balances. Making sure a company’s and its bank’s listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process enables the company to record any interest payments the account has earned or fees the bank has charged.

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