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How to Do a Bank Reconciliation: Step-By-Step Process

In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time. 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 very purpose of reconciling bank statements with your business’s cash book is to ensure that the balance as per the passbook matches the balance as per the cash book.

  1. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet.
  2. Rutherford Inc. has  a difference in the balance as on 31st March 2021 between the bank statement and cash book.
  3. Companies face several challenges when reconciling bank statements to financial activities, so it’s important to highlight common problems you may encounter.
  4. Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees.
  5. Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement.

The frequency of bank reconciliation can vary based on your business’ specific needs. Some businesses balance their bank accounts monthly, after receiving their monthly bank statements. However, businesses with a high transaction volume or increased fraud risk may need to reconcile more frequently, sometimes even daily. The key is to establish a routine that best suits your business’s unique needs and financial activity.

Review: What are bank reconciliations?

To further optimise your accounting process and, therefore, your cash flow, it’s worth leveraging accounts receivable software like that offered by Chaser. An accounting software and dedicated company that really takes into consideration each customer and client, it’s designed to make your bank reconciliations so much easier. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month.

As you know, the balances in asset accounts are increased with a debit entry. In accounting, a company’s cash includes the money in its checking account(s). To safeguard this critical and tempting asset, a company should establish internal controls over its cash.

What is a bank reconciliation statement?

However, there can be situations where your business has overdrafts at the bank. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore quickbooks military discount 20+ always-free courses and hundreds of finance templates and cheat sheets. However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors.

The bank statement contains the bank’s record of all transactions affecting the entity’s bank account throughout the previous period. For instance, the bank charged your business $30 in service fees, but it also paid you $5 in interest. 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. Those payments are recorded in your G/L, but they have yet to hit the bank.

When you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the cheque issued on November 30 is unlikely to be cashed by the bank. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared. To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank. Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook.

How to do Bank Reconciliation?

If you’re using accounting software, it may give you the option to connect your bank account so transactions are automatically downloaded and categorized. This can save you some time, although it’s important to periodically check everything manually to ensure its accuracy and that there are no bank errors. There are bank-only transactions that your company’s accounting records most likely don’t account for. These transactions include interest income, bank deposits, and bank fees. Your books may not match the bank statements because the bank has added expenses. If the bank has added legitimate entries, you need to make adjustments in your books so the two reflect the same transactions.

The cash column in the cash book shows the available cash while the bank column shows the cash at the bank. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. From the following particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2021. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account.

What happens if you leave it too long to do a bank reconciliation?

You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t cleared. The easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank. Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column. The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable. In this blog, we will introduce you to some real-life bank reconciliation examples as well as the major roadblocks faced by organizations while reconciling their bank statements.

Record any bank fees, interest income, or errors found on the bank statement that are not yet in your accounting records. Compare each transaction from your accounting records with those listed on the bank statement to spot any differences. Any unwarranted expenses or missing income should be investigated and accounted for during the reconciliation process. Similarly, entries that have led to the decreased bank statement or bank passbook balance are added to the bank statement or bank passbook balance.

This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. 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. Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. 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.

You’ll also want to look at any miscellaneous deposits that haven’t been accounted for. Once you locate these items, you’ll need to adjust your G/L balance to reflect them. It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely. However, connecting your accounting software to your bank or financial institute does not take the place of doing a month-end bank reconciliation.

But, you will record such transactions only in your business’ cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer.