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How to Prepare a Bank Reconciliation: 8 Steps with Pictures

By reconciling bank statements regularly, business owners can identify any missing or duplicate transactions, bank errors, or fraudulent activity early on, before they become significant problems. Bank reconciliation is the process of comparing accounting records to a bank statement to identify differences and make adjustments or corrections. 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. Many banks allow you to opt for fee-free electronic bank statements delivered to your email, but your bank may mail paper bank statements for a fee. If left to build up for too long, errors and discrepancies can build up and may start to impact your business and cash flow.

  1. If there are any differences, adjust the balance sheet to reflect all transactions.
  2. Companies can designate several individuals to handle certain aspects of bank reconciliation, and they can complete reconciliations in a variety of ways.
  3. There are times when the bank may charge a fee for maintaining your account.
  4. It’s essential to ensure that the starting balance is accurate before beginning the reconciliation process.
  5. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.

If you’ve been charged a fee in error, contact your bank to resolve the issue. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. Therefore, you record no entry in the business’ cash book for the above items. When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. (f) The cash book does not contain a record of bank charges, $70, raised on 31 May.

How to do Bank Reconciliation?

Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement. All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book.

There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book. Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet. Let’s take the following examples to understand the calculation of the bank reconciliation formula in a better manner. Below is a break down of subject weightings in the FMVA® financial analyst program.

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Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. To create a bank reconciliation, you will need to gather your bank statements and reconcile them with your accounting records (ledger). A bank reconciliation statement is a document that is created by the bank and must be used to record all changes between your bank account and your accounting records. It shows what transactions have cleared on your statement with the corresponding transaction listed in your journal.

Bank Interest Earned
Banks may also deposit interest depending on the amount balance in the account for a certain period and get recorded in the bank’s passbook. If so, these entries will not appear in the bank capital campaigns reconciliation statement prepared at the end of the current month. Similarly, some checks credited to the ledger account will probably not have been processed by the bank prior to the bank statement date.

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Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies. Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes. Compare your personal transaction records to your most recent bank statement. First, make sure that all of the deposits listed on your bank statement are recorded in your personal record. If not, add the missing deposits to your records and your total account balance.

It lists the items that make up the differences between the bank statement balance and the accounting system balance, and explains how these differences were resolved. Interest is automatically deposited into a bank account after a certain period of time. So the company’s accountant prepares an entry increasing the cash currently shown in the financial records. After adjustments are made, the book balance should equal the ending balance of the bank account.

How to do a bank reconciliation

If you don’t know what is going in and out of your bank account and how your bank balance fluctuates, you could end up missing vital information. The end result should be a reconciliation of the two balances, with any remaining differences explained and resolved. Bank reconciliation is an important financial control process that helps ensure your financial records are accurate, and there are zero unexplained inconsistencies in your day-to-day transactions. Bank administrators process bank service fees, interest, and other bank transactions that you might not be aware of or not know the exact amounts of. A bank statement shows you those transactions and enables you to capture them in your records to reflect all the transactions affecting your business.

What is a bank reconciliation?

Reconciliation includes matching the company’s balance sheet, income statement, bank statements, and expenses. Having an accurate set of financial statements is essential, or it can lead to complications in financial planning, tax compliance, and legal matters. Notice that the bank reconciliation form above still does not balance, even after including the outstanding checks. This means the bank has made an adjustment to your account that has not been recorded in your G/L. Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile. Ensure that the income and expenses on the balance sheet match the bank statements to identify any unaccounted expenses or deposits.

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. In order to prepare a bank reconciliation statement, you need to obtain the current as well as the previous month’s bank statements and the cash book. As mentioned above, the process of comparing your cash book details with the records of your business’ bank transactions as recorded by the bank is known as bank reconciliation. As a result, the balance as per the bank statement is lower than the balance as per the cash book.

You can also opt to use a simple notebook or spreadsheet for recording your transactions. Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, every week, or even at the end of each day in case of businesses having a huge number of transactions. In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time.