In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. Bank reconciliation is the process of comparing accounting records to a bank statement to identify differences and make adjustments or corrections. In the case 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. To reconcile your bank accounts, you’ll first need a copy of your most recent bank statement and access to your business’s accounting records. Specifically, you’ll want access to the general ledger and cash book, which records your cash and bank transactions.
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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. Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes.
Adjusting Discrepancies Between Books and Bank
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. The goal of bank account reconciliation is to ensure your records align with the bank’s records. This is accomplished by scanning the two 5 tips on how to hire employees with no money sets of records and looking for discrepancies. If you find any errors or omissions, determine what happened to cause the differences and work to fix them in your records. 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.
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In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time. Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned. The very purpose of reconciling bank statements with your business’s cash book is to ensure that the balance as per the passbook matches the balance as per the cash book. Now, while reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. An outstanding cheque refers to a cheque payment that has been recorded in the books of accounts of the issuing company.
- The above case presents preparing a bank reconciliation statement starting with positive bank balances.
- An asset account in a bank’s general ledger that indicates the amounts owed by borrowers to the bank as of a given date.
- More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February).
With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank’s records. You can also perform bank reconciliation by hand, meaning you’d manually compare your bank statement to your general ledger transaction by transaction. Or, if you use accounting software to track your business’s finances and generate financial statements, the software should have a built-in method to speed up bank reconciliation.
When the bank debits a depositor’s checking account, the depositor’s checking account balance and the bank’s liability to the customer/depositor are decreased. You should perform bank reconciliation at least every month—which is how often your bank sends a bank statement. A single 30-day period should give you a manageable number of transactions to compare between accounts. When you do a bank reconciliation, you first find the bank transactions that are responsible for your books and your bank account being out of sync. When you “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy.
After adjusting all the above items what you get is the adjusted balance of the cash book. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. This means that the bank balance of the company is greater than the balance reflected in its cash book. 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. To do this, a reconciliation statement known as the bank reconciliation statement is prepared.
Next, check to see if all of the deposits listed in your records are present on your bank statement. Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly. Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both https://www.kelleysbookkeeping.com/accounting-for-inventory/ sides mentioned at the bottom match. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. There are times when the bank may charge a fee for maintaining your account. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account.
When you’re performing bank reconciliation, you’re basically following the same process as balancing a checkbook—you’re just doing it on a business-wide scale instead of a personal one. We’ll take bookkeeping completely off your hands (and deal with the bank reconciliations too). The more frequently you reconcile your bank statements, the easier it is each time. For the most part, how often you reconcile bank statements will depend on your volume of transactions. The deposit could have been received after the cutoff date for the monthly statement release.
When done frequently, reconciliation statements help companies identify cash flow errors, present accurate information to investors, and plan and pay taxes correctly. They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding. Financial statements show the health of a company or entity for a specific period or point in time. Accurate financial statements allow investors to make informed decisions.
While financial statements like the general ledger indicate how much money a business should have. A bank statement means how much money a company has because it is an accurate picture of all the completed transactions over a specific time that affected its account. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors.
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. If you’re working for yourself, you (or https://www.kelleysbookkeeping.com/ your accountant or bookkeeper) will perform bank reconciliation. But if multiple people handle your business’s finances, the person reconciling the accounts should probably be different from the person signing the checks.