Bank Reconciliation: Purpose, Example, Process

Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. 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. Reconciling items can be recorded in the books using regular journal entries or adjusting journal entries. The journal entries for bank reconciliations are made to record the reconciling items that match up the general ledger (book balance) to the adjusted bank balance.

• Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque.
• The previous entries are standard to ensure that the bank records are matching to the financial records.
• Spotting fraudulent activity earlier helps companies to mitigate risk.
• In accounting, carrying out a bank reconciliation at the end of a financial period is very important to ensure that the financial records of a company are correct.

At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book. After adjusting all the above items, what you get is the adjusted balance as per the cash book. 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.

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 reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix. The bank fee is an expense (cost of doing business) and an expense is shown by an entry on the left side of a ledger (because it decreases our equity), meaning the checking account was decreased as well.

You will ultimately be comparing what your bank’s records are against your own. In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one. The second entry required is to adjust the books for the check that was returned from Berson. A bank reconciliation is structured to include the information shown in Figure 8.6.

Interest and Dividends Collected by the Bank

Reconciling transactions allows companies to accurately submit regulatory reports and returns. These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process. If you commonly make deposits into your account, you’ll want to compare your bank account deposit totals to those listed in your general ledger. Remember, banks make mistakes, too, with transposition errors common. The final entry is to record the bank service charges that are deducted by the bank but have not been recorded on the records.

• Before we dive into the journal entries click here to learn more about bank reconciliation.
• Timing differences can occur when transactions are recorded in different periods, leading to discrepancies between your books and the bank statement, which is the transaction account of the depositor.
• This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank.
• One of the bank reconciliation journal entries is the adjusting entry made to correct an error made by the company or bank.

As you may have realized by now, there really isn’t much difference between the two in an old-fashioned paper system. However, in an automated system, the normal daily transactions would be entered through various forms and processes, such as the cash receipts module or accounts payable and cash disbursements. This decision is a combination of (a) the system you are using, (b) your internal accounting process, and (c) internal control constraints. Usually, a staff member is not allowed to make journal entries or process transactions outside of his or her normal sphere of duties in order to prevent theft or mistakes.

Step #1: Match Each Item On the Bank Statement With Every Item in Your Company’s Cash Account

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, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences. You will know about such information only when you receive the bank statement at the end of the month. At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account. Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account.

Adjusting for Timing Differences

A bank reconciliation is an accounting process that is carried out to compare the balance in a business’s financial records with its bank account balance. This is the process of reconciling a business’ balance sheet with bank statements and GL entries to verify the accuracy of financial statements. This enables finance teams to compare recorded figures and actual values to identify errors and resolve discrepancies. Given the attention that auditors pay to financial statements, balance sheet reconciliation is a vital process to ensure accuracy and completeness. Accurate financial records are the cornerstone of effective and efficient financial operations. Regular and thorough bank reconciliation helps finance teams identify errors, whether this be a credit note not processed, missing transaction or unsettled payment due to a timing difference.

What is a Bank Reconciliation?

At the bottom of your spreadsheet for February, add this note, tracking changes to your balance.

One of the bank reconciliation journal entries is the journal entry for automatic withdrawals and deposits. Companies usually authorize banks to automatically transfer funds into their accounts or out of their accounts. Outstanding checks cause a company’s actual cash balance to be overstated in the bank statement because they have already been recorded in the company’s books as cash disbursements. Hence, they must be subtracted from the bank statement balance in a bank reconciliation.

Types of reconciliation

However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. Sometimes, reconciling errors happen due to human error during data entry and they may require journal entries, after bank reconciliation. You will need to adjust for these timing differences during the bank reconciliation process. With this example for adjusting for timing differences, the journal entry after bank reconciliation depends upon the type of timing differences. In this example, recording bank fees usually have this journal entry after a bank reconciliation. When you record the reconciliation, you only record the change to the balance in your books.

As shown above, all the additions and subtractions done to the bank balance account for timing differences which help the company arrive at its target balance. The target balance is what the general ledger balance should be if the bank statement is right. Therefore, in a bank reconciliation statement, the adjusted bank balance and the adjusted book balance amounts must balance. A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance.

Bank Reconciliation Statement

Therefore, it makes sense to first record these items in the cash book to determine the adjusted balance of the cash book. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation how to calculate your accounts payable ap cost per invoice statement. 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.