How to Prepare a Bank Reconciliation: 8 Steps with Pictures

Bank Reconciliation is the process of comparing your business’ books of accounts with your bank statements. It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet.

• The bank sends the account statement to its customers every month or at regular intervals.
• It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank.
• Single-entry bookkeeping is less complicated than double-entry and may be adequate for smaller businesses.
• This means that the bank balance of the company is greater than the balance reflected in its cash book.
• Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement.

Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. 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.

What if I don’t reconcile my bank accounts?

Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. 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. 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. By doing this, businesses can make sure that their money in the bank matches what they think they have. It is helpful for a company to have a separate general ledger Cash account for each of its checking accounts.

• When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book.
• Reconciliation includes matching the company’s balance sheet, income statement, bank statements, and expenses.
• This article will walk you through everything you need to know about bank reconciliations, including what they are, why they’re important, and how to do them properly.
• At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc.

Bank reconciliation is like solving a puzzle – you gather the pieces, compare them, investigate any differences, make adjustments, and update your records to achieve balance. It’s essential for individuals and businesses alike to stay on top of their financial health. When a company writes a check, the company’s general ledger Cash account is credited (and another account is debited) using the date of the check. Therefore, a check dated June 29 will be recorded in the company’s accounts using the date of June 29, even if the check clears (is paid through) the company’s bank account one week later.

Compare checks and adjust bank’s total

Such cheques are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment. 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. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque.

Note that this balance is different from the company’s general ledger’s Cash account balance of $7,000. Generally, neither balance is the correct amount of cash that should be reported on the company’s balance sheet. Periodic reconciliation is the regular process of matching and comparing figures from accounting records against those presented on a bank statement. If you’re interested in automating the bank reconciliation process, be sure to check out some accounting software options. 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.

Compare top picks for business accounting software

All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. 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. Keeping accurate records of your bank transactions can help you determine your financial health and avoid costly fees. Using this simple process each month will help you uncover any differences between your records and what shows up on your bank statement.

Compare deposits

Single-entry bookkeeping is less complicated than double-entry and may be adequate for smaller businesses. Companies with single-entry bookkeeping systems can perform a form of reconciliation by comparing invoices, receipts, and other documentation against the entries in their books. Some reconciliations are necessary to ensure that cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement. Another way of performing a reconciliation is via the account conversion method.

What Is a Bank Reconciliation Statement?

Adjusting the cash balance ensures your ledger’s balance and the bank statement balance will match. Bank reconciliation statements can help identify accounting errors, discrepancies and fraud. For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement does not show such a deposit, there may have been a mistake or fraud.

How Often Should Individuals Reconcile Their Bank Statements?

GAAP requires that if the direct method is used, the company must still reconcile cash flows to the income statement and balance sheet. Bank reconciliations aren’t a triviality – they’re the difference between thinking you have money and actually having it! Regular bank reconciliation acts as a control mechanism, instantly highlighting any discrepancy in your accounts receivable. You compare your internal sale records with the bank statement at month-end to spot any discrepancies. Those payments are recorded in your G/L, but they have yet to hit the bank. You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t cleared.

They may not be fun, but when you do them on a regular basis you protect yourself from all kinds of pitfalls, like overdrawing money and becoming a victim of fraud. With NetSuite, you go live in a predictable timeframe — smart, using the price to earnings ratio and peg to assess a stock stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. Here’s an example of how By the Bay Contracting’s bank reconciliation would look.