Close this search box.

How to Prepare a Bank Reconciliation: 8 Steps with Pictures

These errors could be those of omission or entering the wrong amount. With each transaction, your bookkeeper, accountant, or accounting software records bank and cash transactions. The bank column displays what’s available in the bank and the cash column depicts what cash is available.

  1. Moreover, we should also trace if Paul’s Plumbing issued checks beyond check number 105.
  2. Deposit in transit refers to checks and/or cash that have been documented within the company’s ledger but have yet to be displayed in the bank in which they were deposited.
  3. Since these are all unrecorded differences, ABC Co. must record them in its accounting system.
  4. Financial reconciliation is the process of looking at various financial records to make sure they are in line with one another.
  5. So far, the checks in the bank statement are check numbers 100, 101, 103, and 105.
  6. It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely.

Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts. How you choose to perform a bank reconciliation depends on how you track your money.

Bank Reconciliations: Step by Step Guide

In QuickBooks, you have the option to make an adjusting entry if the difference isn’t zero when you are finished reconciling. However, adjusting entries should be made only as a last resort for small amounts. If you adjust larger amounts, you risk creating issues for the future. QuickBooks has built-in compatibility with time-tracking and payroll. Employees log their hours, you review and approve them, and QuickBooks does the rest.

Read the steps you should take when closing out your small business’ books for the end of the fiscal year. Therefore, processes must be completed at the end of the year to ensure that all transactions have been properly recorded in the company’s records. With a tool like SolveXia, you’ll be able to complete this process without ever running the risk of missing a deadline. Automation ensures the accuracy of data so you can prevent sharing any financial statements with errors. When your business writes a check to a vendor or employee, you have no control over when they choose to clear the check. However, these residual checks will still exist as paid out amounts from your internal statements.

Timing Differences in Recording of Transactions

Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. 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.

You’ll also always have a clear view on your business’ financial health and can easily pull audits for internal or external review. To overcome these hurdles, automation tools can play a major role. With a tool, you can reconcile accounts that are at high-risk for errors daily to avoid the domino effect of mistakes from snowballing out of control. Not only must you consider the immense amount of data involved, but you must also be aware of timing differences that can affect the process. People across departments or within the same department may be involved in having to complete their own tasks before the sequential step can occur. Asking how often you should reconcile your bank account is like asking how many cups of coffee you need a day.

Finalizing and reconciling the difference

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. Therefore, you need to deduct the amount of these cheques from your bank balance. Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct. You will know about such information only when you receive the bank statement at the end of the month.

Checking for uncredited deposits and unpresented checks

The next step is to adjust the cash balance in the business account. Physically mark the transactions that match the ones you entered into QuickBooks. These aren’t causing issues.This gives you a much shorter list to work with.

An outstanding cheque refers to a cheque payment that has been recorded in the books of accounts of the issuing company. But, the cheque has not yet been cleared by the bank as a deduction from the company’s cash balance. NSF cheques are an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. But this is not the case as the bank does not clear an NFS cheque.

What is the Purpose of a Bank Reconciliation?

For example, many retailers or eateries will execute the process daily. However, the bank service charge of $10 in our bank statement doesn’t appear in our check register. The bank service charge is erroneously omitted from the books, so it should be added to the check register.

Accurate financial statements allow investors to make informed decisions. The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period. Any discrepancies lead to making necessary adjustments or corrections. These items are typically service fees, overdraft fees, and interest income.

Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences. A bank statement shows what transactions have taken place in a business’ bank account over the last month. At the same time, your business maintains its own financial records. By comparing your cash balance on your working capital turnover ratio balance sheet to the amount on a bank statement, you’re able to ensure that transactions are a reflection of reality. The first step in preparing bank reconciliation is to obtain both the bank statement and bank book balances of a company and compare them. If these balances are different, then the company must prepare a 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. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account.