How to Prepare a Bank Reconciliation: 8 Steps with Pictures

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 purpose behind preparing the bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same.

As a result, Community Bank’s balance sheet will report an additional $10,000 in assets and an additional $10,000 in liabilities. Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook. Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits. Once the journal entries are recorded, the general ledger is prepared.

  • The more frequently you reconcile your bank statements, the easier it is each time.
  • 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.
  • Errors are generally rectified promptly if they are caused due to an error in the bank book.
  • After identifying the reasons your bank statement doesn’t match accounting records, you have to update your records.
  • Solutions such as HighRadius’s cash management software can auto-reconcile transactions based on standard and user-defined tagging rules, saving time and reducing the risk of errors.

Especially if the accounting department has to chase paperwork and approvals. 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. But, you will record such transactions only in your business’ cash book only when you receive the bank statement.

Step 4. Look for Bank Adjustments

Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid). You only need to reconcile bank statements if you use the accrual method of accounting. This is to confirm that all uncleared bank transactions you recorded actually went through.

  • For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash.
  • For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period.
  • The items therein should be compared to the new bank statement to check if these have since been cleared.
  • 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.

After all adjustments are made, the balance on a bank reconciliation statement should equal the ending balance of the bank account. The frequency of reconciling bank statements depends on the size and complexity of the business and its transaction volume. For larger companies with a high volume of transactions, it’s advisable to reconcile bank statements daily to ensure that any discrepancies or errors are identified and corrected promptly. Miscellaneous debit and credit entries in the bank statements must be recorded on the balance sheet. If there are any differences, adjust the balance sheet to reflect all transactions.

Do you own a business?

The bank prepares a bank statement including cash deposits and withdrawals for a month. Whereas, accounting record book records the same entries by the hands of the accountant. Go through all of the deposits in your bank account and make sure that each deposit on the bank statement has a matching entry within your accounting records.

Compare the balances again

In a future article we will discuss how to account for such transactions (loan disbursement) in the company’s accounting system. Secondly, all items that were on the credit side of your general ledger but was not seen on your bank statement’s debit side. These are mainly outstanding cheques and transfers done closer to the end of the month posting in accounting — definition and meaning but is yet to be processed by the bank. Bank reconciliations provide reassurance that what you have recorded within your accounting records perfectly matches what’s actually on your bank statement. Since the adjusted balance for both the bank book and bank statement is $400, it means there are no extra items that need to be reconciled.

What is the Purpose of a Bank Reconciliation?

Bank officials add money in beneficiary’s account after receiving a cheque. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Nevertheless, on 5 June, when the bank pays the check, the difference will cease to exist. Understanding how much cash you have on hand as well as the increase or decrease in cash over a certain period is absolutely crucial for the success of any business.

This is especially common in cases where the cheque is deposited at a bank branch other than the one at which your account is maintained. 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. Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque. This is because the current account on which the cheque is drawn does not have sufficient funds to honour the cheque. This practical article illustrates the key points of why a bank reconciliation is important for both business and personal reasons.

For example, if you ordered a wire transfer or stopped payment on a check, your bank may have charged fees for this. Similarly, any interest payments you earned will only be reflected in the bank statement and not your business’s general ledger at the end of the month. The more frequently you reconcile your bank statements, the easier it is each time.

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.

Without a prior arrangement with the bank, such as an overdraft facility, the bank will likely return or “bounce” the cheque back to the endorser. Using a pencil, match the deposits on the debit (left) side of your general ledger with the deposits on the credit (right) side of your bank statement. Once you are finished, match the transactions on the credit side of your general ledger with those on the debit side of your bank statment. Reconciliation makes the bank statement error-free and clears additional charges. Therefore, before closing the accounting chapter in the banking book, reconciliation checks whether the closing page hits green light i.e. ending is correct and safe. Once the initial check is complete, mark all items remained in the ledger.

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