Bank Reconciliation: Definition, Example, and Process

When your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts. In addition, there may be cases where the bank has not cleared the checks, however, the checks have been deposited by your business. Banks take time in clearing checks, so the bank needs to add back the check’s amount to the bank balance.

Reconcile Balances

Regular reconciliation and review of financial records can help identify and resolve errors promptly, reducing the risk of financial issues. Check if the bank deposits and withdrawals match the records on the balance sheet. If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source. There are bank-only transactions that your company’s accounting records most likely don’t account for.

1. Similarly, some checks credited to the ledger account will probably not have been processed by the bank prior to the bank statement date.
2. The statement itemizes the cash and other deposits made into the checking account of the business, as well as any expenses paid by the business.
3. Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees.
4. If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise!

What is your current financial priority?

These deposited checks or discounted bills of exchange drawn by your business may get dishonored on the date of maturity. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. It is important to note that it takes a few days for the bank to clear the checks.

This often happens when the checks are written in the last few days of the month. Match the deposits in the business records with those in the bank statement. By comparing your company’s internal accounting records to your bank statement balance, you can confirm that your records are accurate and analyze the reasons behind any potential discrepancies.

Bank Reconciling Statement: Adjusting Balance per Bank

Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors. A bank reconciliation statement can help you identify differences between your company’s bank and book balances. Before you reconcile your bank account, you’ll need to ensure that you’ve recorded all transactions from your business until the date of your bank statement.

Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile. To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another. More specifically, a bank reconciliation means balancing your bank statements with what is a setup charge your bookkeeping. Discrepancies in bank reconciliations can arise from data processing errors or delays and unclear fees at the bank. Unpredictable interest income may also be a challenge when calculating financial statements, which can lead to challenges during a bank reconciliation.

All of this can be done by using online accounting software like QuickBooks, but if you are not using accounting software, you can use Excel to record these items. As a result of these direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book. These debits made by the bank directly from your bank account will lead to a difference between balances. This means that the company’s bank balance is greater than the balance reflected in the cash book. This is an important fact because it brings out the status of the bank reconciliation statement.

This includes payments by customers to your company and payments from your company to employees, contractors, and other goods and services providers. Greg adds the $11,500 of deposits in transit to his bank statement balance, bringing him to $99,500. He also subtracts the $500 in bank fees from his financial statement balance, bringing him to $99,500 and balancing the two accounts. Bank reconciliation statements are tools companies and accountants use to detect errors, omissions, and fraud in a financial account. Bank reconciliation is a simple and invaluable process to help manage cash flows. Financial statements show the health of a company or entity for a specific period or point in time.