How to Prepare a Bank Reconciliation: 8 Steps with Pictures
This can range from one-off errors such as calculation mistakes or double payments to major concerns like theft and fraud. Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records. This relatively straightforward and quick process provides a clear picture of your financial health. Consider reconciling your bank account monthly, whether you set aside a specific day each month or do it as your statements arrive. Keeping accurate records of your bank transactions can help you determine your financial health and avoid costly fees.
- Completing a bank reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records.
- These deposited checks or discounted bills of exchange drawn by your business may get dishonored on the date of maturity.
- When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference.
- This is especially common in cases where the check is deposited at a different bank branch than the one at which your account is maintained, which can lead to the difference between the balances.
For large organizations and small businesses alike, a bank reconciliation should be prepared periodically because it enables you to report the most up-to-date figures. Knowing this information enables you to discover potentially nefarious activities, the bank administrator’s incompetence, or weaknesses in your reporting system in a timely manner. Additionally, many businesses are required by law to reconcile their bank accounts on a regular basis as part of their financial reporting obligations. Discrepancies in bank reconciliations can arise from data processing errors or delays and unclear fees at the bank.
Accounting for Cash at the Company
We strongly recommend performing a bank reconciliation at least on a monthly basis to ensure the accuracy of your company’s cash records. A monthly reconciliation helps to catch and identify any unusual transactions that might be caused by fraud or accounting errors, especially if your business uses more than one bank account. Check the balances of the bank statements and the cash balance in your books after you’ve adjusted all the transactions and compared them.
It’s recommended for a company to perform a bank reconciliation at least once a month. If your company receives bank statements more frequently, for example, every week, you may also choose to do a bank reconciliation for every statement you bookkeeping in plano receive. The deposit could have been received after the cutoff date for the monthly statement release. Depending on how you choose to receive notifications from your bank, you may receive email or text alerts for successful deposits into your account. This is a simple data entry error that occurs when two digits are accidentally reversed (transposed) when posting a transaction. For example, you wrote a check for $32, but you recorded it as $23 in your accounting software.
How To Do A Bank Reconciliation: Step By Step
However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. The final step in the bank reconciliation process is to record journal entries to complete the balancing process. 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. In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary. However, small business owners and bookkeepers need to remember that yes, banks do make mistakes, and one of the best ways to find those mistakes is by reconciling all of your bank accounts monthly.
NSF checks are an item to be reconciled when preparing the bank reconciliation statement, because when you deposit a check, often it has already been cleared by the bank. But this is not the case as the bank does not clear an NFS check, and as a result, the cash on hand balance gets reduced. Non-sufficient funds (NSF) checks are why the xero app marketplace is so important recorded as an adjusted book-balance line item on the bank reconciliation statement. For instance, if you haven’t reconciled your bank statements in six months, you’ll need to go back and check six months’ worth of line items.
Reconcile Balances
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. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. 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. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days.
Bank Reconciliations: Everything You Need to Know
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. However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors. They may not be fun, but when you do them on a regular basis you protect yourself from all kinds of pitfalls, like overdrawing money and becoming a victim of fraud. It’s not uncommon for companies to pay a supplier twice for the same invoice, especially when it’s a recurring amount. Michelle Payne has 15 years of experience as a Certified Public Accountant with a strong background in audit, tax, and consulting services. She has more than five years of experience working with non-profit organizations in a finance capacity.
If you suspect an error in your books, see some common bank reconciliation errors below. You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee. As a result of these 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.