In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals. To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business.

Accuracy in maintaining financial records is vital to proper bank reconciliation. For instance, if according to your records, your current balance is $5000 and your bank statement similarly shows $5000, your bank account is considered reconciled. But, if there’s a mismatch, say your records show $5000 while the bank statement indicates $5500, the account is unreconciled, and you must identify the error and correct it.

  • It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely.
  • If, for example, they say they’ll withdraw money to pay for a business expense and take more than they journalize on the books, a bank reconciliation would instantly highlight that.
  • However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences.
  • The transaction status must then be corrected, which necessitates changes.
  • Bank reconciliation compares a company’s books with its bank statements to ensure that all transactions are accounted for.

This helps to ensure that there are no discrepancies between the two systems and that your books accurately reflect your financial position. Bank reconciliation accounting is performed by the accounts payable department. It’s a means of comparing bank statements against a company’s personal records to spot any discrepancies, mistakes, cash manipulations, or fraudulent charges. Check the balances of the bank statements and the cash balance in your books after you’ve adjusted all the transactions and compared them.

If you don’t ensure the business and bank are on the same page, tiny mistakes can snowball into huge problems. Similarly, if a businessman deposits any checks on the last day of the month, these cheques may be collected by his bank and shown on his bank statement three or four days later. The bank reconciliation statement explains the difference between the balance in the company’s records and the balance in the bank’s records.

Step 4: Make adjustments to the books

If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet. Completing a bank reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records. The process can help you correct errors, locate missing funds, and identify fraudulent activity. A bank reconciliation statement is prepared by a depositor (account holder) to overcome differences in the balances of the cash book and bank statement. A bank reconciliation statement is a summary that shows the process of reconciling an organization’s bank account records with the bank statement. 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.

The account holder is responsible for preparing a bank reconciliation to identify differences between the cash balance and the bank statements. First and foremost, bank reconciliation matters because it helps you get a real view of your business’s finances. When you review your books, it’s important that what you’re reading reflects reality. Otherwise, you could end up spending cash you don’t own, or holding back from potential investments and financial growth. Frequent bank reconciliations confirm your accounts match up, which allows you to properly track your cash flow and as a result, make sensible financial decisions. Your business and the bank keep separate records of deposits, withdrawals, checks, and every other cash balance that flows in and out of the business.

How to Do a Bank Reconciliation: Step-by-Step

Reconciliation reports provide a summary of the reconciliation process and help to identify any errors or discrepancies. Failing to review these reports regularly can lead to errors in the reconciliation process. Your bank reconciliation form can be as simple or as detailed as you like. For example, your bank statement shows that your ending balance is $11,450, while your G/L balance according to your trial balance is $10,850. Businesses maintain a cash book to record both bank transactions as well as cash transactions.

How to Prepare a Bank Reconciliation

When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. This means that the bank balance of the company is greater than the balance reflected in its cash book. Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance.

Guide to Understanding Accounts Receivable Days (A/R Days)

A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud. The statement displays the reasons for the differences between the two. A company can prepare a bank reconciliation statement at any time during the financial period.

Reasons for Preparing a Bank Reconciliation

A bank reconciliation is a critical tool for managing your cash balance. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement. This process helps you monitor all of the cash inflows and outflows in your bank account. The reconciliation process also helps you identify fraud and other unauthorized cash transactions. As a result, it is critical for you to reconcile your bank account within a few days of receiving your bank statement.

Fraudulent activity can also happen if you’re in a partnership and share a joint account with your business partner. If, for example, they say they’ll withdraw money to pay for a business expense and take more than they journalize on the books, a bank reconciliation the difference between a journal and a ledger would instantly highlight that. For instance, it may happen that you make an invoice payment to a supplier by check, and they tamper with it by increasing the withdrawal amount. This type of inconsistency would show up in your bank reconciliation statement.