Bank Reconciliation Explanation

It is essential for maintaining accurate business financial records, which helps in tax filing and getting an overall idea of the company’s finances. The cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement. In these cases, journal entries record any adjustment to the book’s balance. After fee and interest adjustments are made, the book balance should equal the ending balance of the bank account.

Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there. However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. It’s common for your bank statement to have a higher ending balance than your G/L account shows. While it may be tempting to assume you have more money in the bank than you think, it’s a safe bet that the difference is checks and other payments made that have not yet hit the bank.

The bank reconciliation (if prepared or reviewed by someone other than the person with access to the checking account) is a form of internal control over a company’s checking account balance. Basically, the bank reconciliation compares the amounts in a company’s accounting records with the amounts in its bank’s records. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement. This process helps you monitor all of the cash inflows and outflows in your bank account. The reconciliation process also helps you identify fraud and other unauthorized cash transactions.

1. Business owners regularly compare their records with bank transactions to ensure there are no errors.
2. The bank reconciliation statement explains the difference between the balance in the company’s records and the balance in the bank’s records.
3. There are times when the bank may charge a fee for maintaining your account.
4. (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.
5. Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits.

Enhanced electronic clearing procedures adopted by banks have made kiting far more difficult to accomplish. Note that Community Bank credits its liability account Customers’ Deposits (which includes https://quickbooks-payroll.org/ the individual depositor’s checking account balance). As a result, Community Bank’s balance sheet will report an additional $10,000 in assets and an additional $10,000 in liabilities.

It can also adjust the balances to the bank statement to reach the adjusted bank book balances instead. Preparing a bank reconciliation requires a company to take a step by step approach. The easiest step by step approach to preparing bank reconciliation is through a 5-step process. If a company has more than one bank accounts, it will need to carry out the process for each account separately. Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, every week, or even at the end of each day in case of businesses having a huge number of transactions.

Step 4: Find G/L adjustments

For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period. A bank reconciliation statement is only a statement prepared to stay abreast with the bank statement; it is not in itself an accounting record, nor is it part of the double entry system. The bank statement submitted by the businessman at the end of May will not contain an entry for the check, whereas the cash book will have the entry. Also illegal is “kiting” which occurs when one opens numerous bank accounts at various locations and then proceeds to write checks on one account and deposit them to another.

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. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits. 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.

The bank will debit your business account only when the bank pays these issued cheques. One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts. This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook. payroll services small business If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the issue. Instead of doing a bank reconciliation manually and risking oversight, you need expense management software to ensure efficiency and accuracy.

This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. The reconciliation of bank statements is a critical step in maintaining accurate financial records for any business. It helps to ensure that the company’s accounting records are up-to-date and accurate, which is essential for making informed business decisions. By reconciling bank statements regularly, business owners can identify any missing or duplicate transactions, bank errors, or fraudulent activity early on, before they become significant problems.

Common Errors to Avoid During Bank Reconciliation

He has been quoted by publications like Readers Digest and The Wall Street Journal. Kevin’s work has been featured in Bankrate, Credible, CreditCards.com, Fox Money, LendingTree, MarketWatch, Newsweek, New York Post, Time, ValuePenguin and USA Today. It’s not uncommon for companies to pay a supplier twice for the same invoice, especially when it’s a recurring amount.

What is the approximate value of your cash savings and other investments?

Cross-checking bank statements with the balance sheet at least once every month during the closing process is necessary. If the business has a high volume of transactions, reconciliations should be done more frequently. Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts. The company reflected the payment it received from debtors in its cashbook, but the payment hasn’t yet reflected in the bank account. Be aware that conducting a successful bank reconciliation requires careful attention to every detail.

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. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly.

Match Deposits and Withdrawals to the Balance Sheet

For example, say ABC Holding Co. recorded an ending balance of $500,000 on its records. After careful investigation, ABC Holding found that a vendor’s check for $20,000 hadn’t been presented to the bank. It also missed two $25 fees for service charges and non-sufficient funds (NSF) checks during the month. A bank may charge an account maintenance fee, typically withdrawn and processed automatically from the bank account. When preparing a bank reconciliation statement, a journal entry is prepared to account for fees deducted.

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Documentation also helps non-reconciliation employees cross-check data and refer back to source documents. 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. Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book.

Categorised in: Bookkeeping

This post was written by James Habib