How To Do A Bank Reconciliation: Step By Step

Try FreshBooks for free to streamline your tax preparation and bank reconciliations today. A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud. The first step in preparing bank reconciliation is to obtain both the bank statement and bank book balances of a company and compare them.

Failing to record all transactions:

1. Using cloud accounting software, like Quickbooks, makes preparing a reconciliation statement easy.
2. There are times when your business will deposit a check or draw a bill of exchange discounted with the bank.
3. After adjusting all the above items, you’ll end up with the adjusted balance as per the cash book, which must match the balance as per the passbook.
4. When your business issues a check to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash book.
5. Accounting for these delays is key to reconciling the total amounts on the company’s financial statement and the bank statement.

It is important to note that it takes a few days for the bank to clear the checks. 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. After adjusting all the above items, you’ll end up with the adjusted balance as per the cash book, which must match the balance accounting for acquired goodwill as per the passbook.

What Is a Bank Reconciliation Statement, and How Is It Done?

This includes payments by customers to your company and payments from your company to employees, contractors, and other goods and services providers. Sometimes your current bank account balance is not a true representation of cash available to you, especially if you have transactions that have not settled yet. If you’re not careful, your business checking account could be subject to overdraft fees.

However, there may be a situation where the bank credits your business account only when the checks are actually realised. The purpose of preparing a bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. Likewise, ‘credit balance as per cash book’ is the same as ‘debit balance as per passbook’ means the withdrawals made by a company from a bank account exceed deposits made. 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.

Once you have identified all the differences between the two statements, identify the source of the discrepancy. Remember that transactions that aren’t accounted for in your bank statement won’t be as obvious as bank-only transactions. This is where your accounting software can help you reconcile and keep batch level activity track of outstanding checks and deposits. Most reconciliation modules allow you to check off outstanding checks and deposits listed on the bank statement. You’ll need a few items to perform a bank reconciliation, including your bank statement, internal accounting records, and a record of any pending cash transactions (either inflows or outflows). ABC Co. can start from the adjusted bank book balance and adjust the timing differences to it to reach the bank statement balance.

Deposits in Transit

These may include deposits in transit, outstanding checks, bank fees, or miscalculations by the bank or the internal accounting team. You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business, as well as any expenses paid by the business. This includes everything from wages and salaries paid to employees to business purchases like equipment and materials. Bank statements also show expenses that may not have been included in financial statements, such as bank fees for account services.

What to Look for When Preparing a Bank Reconciliation?

These checks are in transit, so they haven’t yet been deposited into the company’s bank account. He also finds $500 of bank service fees that hadn’t been included in his financial statement. Bank charges are service charges and fees deducted for the bank’s processing of the business’s checking account activity. If you’ve earned any interest on your bank account balance, it must be added to the cash account. Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records.

At times, you might give standing instructions to your bank to make payments regularly on specific days to third parties, such as insurance premiums, telephone bills, rent, sales taxes, etc. We offer reconciliation reports, discrepancy identification, and live accountants to work with for ease and confidence when closing your books. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors. Michelle Payne has 15 years of experience as a Certified Public Accountant with a strong background in audit, tax, and consulting services.

10% of all occupational fraud cases what is days sales outstanding how to calculate and improve dso in small businesses are due to bank account reconciliation errors. After adjusting all the above items what you’ll get is the adjusted balance of the cash book. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.

This can be done by creating a checklist or using a reconciliation software tool. Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet. Not-sufficient funds (NSF) refers to a situation when your bank does not honour a check, because the current account, on which the check is drawn, has insufficient funds. 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. These checks are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment.