How to Prepare a Bank Reconciliation: 8 Steps with Pictures

At the bottom of your spreadsheet for February, add this note, tracking changes to your balance. For this reason, and to minimise the amount of work involved, it is good practice to carry out reconciliations at reasonably frequent intervals. Our experts have been helping you master your money for over four decades.

  • Adjustments are also made to the book balance, like adding interest earned and subtracting bank service charges.
  • As a result, it is critical for you to reconcile your bank account within a few days of receiving your bank statement.
  • You will know about such information only when you receive the bank statement at the end of the month.
  • This guide is meant to catch up for those just starting with bookkeeping.

An online template can help guide you, but a simple spreadsheet is just as effective. Bank service charges are fees the bank charges for various services they provide, such as monthly maintenance or overdraft fees. Bank service fees can affect your account balance and must be accounted for during reconciliation. A Bank Statement Reconciliation is the process where you confirm your financial records align with those of your bank. Its importance lies in keeping accurate financial records and detecting possible fraud or errors. It’s no secret that bank reconciliations are one of the most dreaded tasks in accounting, but they’re also one of the most important.

What is the Bank Reconciliation Statement?

Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences. There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank.

  • 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.
  • Check out our bookkeeping basics to continue setting up your books and building a solid financial foundation for your new business.
  • The goal of creating a bank reconciliation statement is to ensure that the cash records of your business are correct, and the bank balance is equal to the balance in your financial records.
  • A single 30-day period should give you a manageable number of transactions to compare between accounts.
  • If you’re finding withdrawals that aren’t listed on the bank statement, do some investigation.

In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business. Therefore, the bank needs to add back the cheque’s amount to the bank balance. Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. All of this can be done by using online accounting software like QuickBooks. In case you are not using accounting software, you can use Excel to record such items.

Sure, there are a number of professionals that can provide expertise in this task, the most obvious being an accountant. If you decide to hire someone to help, make sure they are following GAAP, or have credentials and experience that you trust. However, if you decide to tackle the task on your own you can save a lot of money. Also, if your business is small and you’re just starting out, reconciling your own accounts can be a valuable learning experience. Accrual accounting and double-entry bookkeeping can be complex to implement – especially if you’re doing it without the help of software or a qualified professional. Although bank reconciliation won’t stop fraud in its tracks, it can let you know whether it’s happened, as well as the when and where.

Step 2. Compare Deposits

Cloud accounting software like Quickbooks makes preparing a reconciliation statement easy. Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. Furthermore, each of the items is matched with your books of accounts. Once the adjusted balance what is the form 2553 for your business of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet.

Reconciling Your Bank Statement with QuickBooks

Once you post the journal entries into your company ledger accounts, make sure that the cash account balance is equal to the adjusted balance per cash book shown in the bank reconciliation statement. Creating journal entries is a fundamental final step in the bank reconciliation process, ensuring your balance sheet perfectly matches your bank statement. This process accurately reflects all transactions, thereby making your financial monitoring accurate and transparent. Bank reconciliation plays an important role in getting detailed visibility into cash availability, accurate reporting, fraud detection, faster financial close, and seamless audits. Regular bank reconciliations can help businesses identify any conflicting items on bank statements and take necessary action immediately. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.

Cheques Paid into the Bank But Not Yet Collected or Credited

When you use accounting software to reconcile your books, the software automates most of the work for you, saving you a great deal of time and effort. If you’re handling the process manually, however, you need to verify all of your sales, expenses, and other transactions, through a predefined, step-by-step process. It might happen that after providing a service or finishing a project, a client promises to send a check – so you debit cash, and then forget about their payment altogether. Even though your bookkeeping will show they paid, only through your bank reconciliation will you be able to notice that the client hasn’t sent any payment yet and that there’s a receivable pending. It can also happen that a client pays their dues, but you don’t receive a notification, or simply forget to journalize the transaction altogether.

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. There’s a $650 difference between the company’s bank account balance and book balance.

Problems with Bank Reconciliations

Reconciling items are discrepancies between your records and the bank statement. These errors can include mistakes made in handling cash or recording transactions incorrectly in a bank account, such as missing entries. Bank reconciliation involves the comparison of business and bank records and identifying any difference between the two. It should be conducted at the end of every month when the bank sends the statement with the beginning cash balance, monthly transactions and end balance. Bank reconciliations are typically prepared by the company’s accounting or finance department.

If you’re working for yourself, you (or 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. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. When you “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy. Then, you make a record of those discrepancies, so you or your accountant can be certain there’s no money that has gone “missing” from your business. Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account.

With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have. Bank reconciliations may be tedious, but the financial hygiene will pay off. If you’re doing a reconciliation every month, your starting balance will be the final balance from the previous month. Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first.

Reconciling your bank statements with your internal records can ensure accuracy, detect discrepancies, and maintain control over your finances. You need to adjust your cash account balance when conducting a bank reconciliation. This means thinking about any checks or deposits that the bank hasn’t processed yet. If someone hasn’t cashed a check you wrote, you must subtract that money from your balance. Next, record what you did to match the balances- this will help you stay organized and ensure accuracy.

During the month of June the company wrote five checks with a total of $5,000. It also made a $2,000 deposit in the bank’s night depository after banking hours on June 30. As a result, the company’s Cash account (in its general ledger and referred to as the “books”) as of June 30 shows a positive, debit balance of $7,000.

This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. 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. To successfully complete your bank reconciliation, you’ll need your bank statements for the current and previous months as well as your company ledger.

Failing to reconcile can make it challenging to track expenses accurately or identify cash flow issues. It involves comparing a company’s bank statements with its records of bank transactions. First and foremost, bank reconciliation matters because it helps you get a real view of your business’s finances. When you review your books, it’s important that what you’re reading reflects reality. Otherwise, you could end up spending cash you don’t own, or holding back from potential investments and financial growth. Frequent bank reconciliations confirm your accounts match up, which allows you to properly track your cash flow and as a result, make sensible financial decisions.

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