As mentioned above, two different documents show the bank balance of a company at the end of a specific period. The company prepares the bank book while its bank prepares the bank statements. At the end of the period, there are going to be differences between the balances in both the documents.

When they draw money from your account to pay for a business expense, they could take more than they record on the books. You’d notice this as soon as you reconcile your bank statement. DateDescriptionPayments (Dr.)9-MayDirect Debit1,50016-MayBank charges15023-MayInterest charges300Therefore, these must be recorded. The bank book of ABC Co. will be credited with the above amounts because they are all payments from the bank account.

Problems with Bank Reconciliations

With bank statement in-hand, you can systematically check off matching transactions one-by-one by clicking their boxes. The bottom of the screen contains a running total of items you have checked off, How to prepare bank account reconciliation and thus have been reconciled. This is useful for comparing the totals in your books to the totals on your bank statement. To complete the reconciliation, make sure the difference shown is zero.

To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting. If a check stays uncleared by the bank for an extended amount of time, you will likely void the check and create a replacement. However, occasionally the payee will still attempt to cash the original check. If the check was voided through the bank, they should refuse to cash it. If the bank wasn’t told about the voided check, then you will need to apply a credit to the cash account as well as a debit explaining the payment. For example, if you ordered a wire transfer or stopped payment on a check, your bank may have charged fees for this. Similarly, any interest payments you earned will only be reflected in the bank statement and not your business’s general ledger at the end of the month.

Steps to Manually Reconcile a Bank Statement

Check for any errors made by the bank’s processing department. If you’re reconciling a business cash account, your accounting is posted to general ledger. A business should compare the cash account’s general ledger to the bank statement activity.

Similarly, without bank reconciliation, the company cannot identify any expenses that the bank may have charged to the bank account. Therefore, the expenses of the company will be misstated and go against the prudence concept of accounting. To prepare a bank reconciliation, gather your bank statement and a list of all of your recent transactions.

Review Deposits, Checks, and Debits

That is because they receive bank statements at the end of each month. Some small-sized companies prepare bank reconciliations once every 2-3 months. While preparing bank reconciliations regularly is better than preparing it after a couple of months, if the number of bank transactions is low, companies may choose to perform it later. A bank reconciliation statement is a document that compares the bank book balance of a company with its bank statement balance.

You may come across a transaction that you cannot fully explain. If you’re unclear about a business or personal bank transaction, contact your bank. If you have online access to your account, your bank statement should be available shortly after that last day of the month. Your goal is to reconcile any differences between the bank balance and your cash account records. On the cash book side of the bank rec, adjusting journal entries need to be posted into the general ledger cash account for each of the reconciling items.

To see your business as it really is

Next, we look at how a bank uses debit and credit when referring to a company’s checking account transactions. Businesses should reconcile their bank accounts within a few days of each month end, https://accounting-services.net/ but many don’t. Learn from these 10 common accounting mistakes to make improvements in your business. Review the bank statement for account fees and error adjustments posted by the bank.

• These are differences that are recorded in the bank statement of a business but not in the bank book of the business.
• Your goal is to identify the reason the two records don’t match, and correct them until they do.
• Bank reconciliations are performed by comparing the balances from the bank book and bank statement and identifying differences and the types of those differences.
• The treatment for timing differences in a bank reconciliation is to use them as a reconciling item.
• Using the cash balance shown on the bank statement, add back any deposits in transit.

The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match. The bank statement and the company’s books now have a balance of $6,975 so the bank statement is reconciled. Make sure that all of your bank deposits and withdrawals are accounted for in your bank statement. The ending balance on the business’s bank statement and its book balance are almost never exactly the same, so you typically need to adjust the book balance to conform to the bank statement. The top of the report will display summary information similar to the top of the reconciliation screen.

Calculate the Adjusted Bank Balance

After all reconciliation adjustments, the final correct cash balance captured in the company accounting records and on its balance sheet as at 30 September 20XX was $2,000. Company A paid $3,750 worth of checks into its bank account and debited its cash book accordingly, but the bank has not yet credited the funds to the depositor’s account. 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. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days. This is probably the most important step in the entire bank reconciliation process.

Timing differences are items that cause a difference between the balances in the bank statement and bank book due to the timing of transactions. These differences generally comprise two types of items, outstanding checks, and deposits in transits, also known as outstanding lodgments. An outstanding check is a check that a company pays another party, but the party does not present it to the bank. For example, a company pays its supplier through a check, but the supplier does not take it to the bank before the bank prepares the bank statement. Bank reconciliation is a part of the internal control process of a company.

The other side of the entries will be taken to their relevant accounts, for instance, bank charges account. It must ensure that the bank book balance is taken for the last date of the previous month or the month for which the bank statement is considered. To prepare a bank reconciliation, it is important that both the bank book and the bank statement of the business are available. Any difference that is not an unrecorded difference or a timing difference is an error.