How To Do A Bank Reconciliation: Step By Step

It also missed two $25 fees for service charges and non-sufficient funds (NSF) checks during the month. 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. When your business receives checks from its customers, these amounts are recorded immediately on the debit side of the cash book so the balance as per the cash book increases.

Adjusting Journal Entries

Once you’ve completed the balance as per the bank, you’ll then need to work out the balance as per the cash book. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market.

First off, what is bank reconciliation?

Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. It’s recommended for a company to perform a bank reconciliation at least once a month. If your company receives bank statements more frequently, for example, every week, you may also choose to do a bank reconciliation for every statement you receive. Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there. However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded.

Keep up with Michelle’s CPA career — and ultramarathoning endeavors — on LinkedIn. The goal is to get your ending bank balance and capex formula ending G/L balance to match. 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. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. (e) Standing order payment of $1,500 (for rent) also fails to appear in the cash book. Nevertheless, on 5 June, when the bank pays the check, the difference will cease to exist.

Step 3. Compare Withdrawals

The bank may send you a bank statement at the end of each month, each week, or, if your business has a large number of transactions, they may even send one at the end of each day. There are times when the bank may charge a fee for maintaining your account, which will typically be deducted automatically from your account. Therefore, when preparing a bank reconciliation statement you must account for any fees deducted from your account. At times, your business may either omit or record incorrect transactions for checks issued, checks deposited, or the wrong total, etc.

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. 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. They are helpful when reconciling accounts to print statements, clearing errors, etc. They can also be helpful when reconciling accounts for pulling reports.Another example would be where you deposit cash, but the teller doesn’t post it correctly. You have to go back and compare your records with the bank’s to try and figure out what went wrong so you can correct your records to match the banks.

This is also known as an unfavorable balance as per the cash book or an unfavorable balance as per the passbook. The debit balance as per the cash book refers to the deposits held in the bank, and is the credit balance as per the passbook. Deposits in transit, or outstanding deposits, are not showcased in the bank statement on the reconciliation date. This is due to the time delay that occurs between the depositing of cash or a check and the crediting of it into your account. Performing immediate bank reconciliations for large cash amounts or suspicious transactions further increases your ability to catch fraud and error. Let’s take a look at a hypothetical company’s bank and financial statements to see how to conduct a bank reconciliation.

1. Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting.
2. If you find any errors or omissions, determine what happened to cause the differences and work to fix them in your records.
3. 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.
4. Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document.

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. When your business issues a check to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash book. However, there might be a situation where the receiving entity may not present the checks issued by your business to the operations management insight blog the bank for immediate payment. If you want to prepare a bank reconciliation statement using either of these approaches, you can use the balance as per the cash book or balance as per the passbook as your starting point.