After identifying the reasons your bank statement doesn’t match accounting records, you have to update your records. If the bank has made errors, notify them so that they correct the transactions. You need to make sure that all the deposits you’ve recorded in the books reflect in the bank statement. Match each deposit from the debit side of your record to the credit side on the bank statements while ensuring that the amounts correspond. You (and other stakeholders) need to know that the amount of cash that is reported on your company’s balance sheet is accurate.

  • This may occur if you were subject to any fees, like a monthly maintenance fee or overdraft fee.
  • But, the cheque has not yet been cleared by the bank as a deduction from the company’s cash balance.
  • We’ll take bookkeeping completely off your hands (and deal with the bank reconciliations too).
  • For example, say ABC Holding Co. recorded an ending balance of $500,000 on its records.

Once you locate these items, you’ll need to adjust your G/L balance to reflect them. 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. This is probably the most important step in the entire bank reconciliation process.

More Resources on Small Business Accounting

Bank reconciliation is one of the most important components of accounting. And more importantly, how can bank reconciliation software strengthen the process? Let’s delve into this and more when we review how a bank reconciliation should be prepared. When you record the reconciliation, you only record the change to the balance in your books.

The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. The balance recorded in your books (again, the cash account) and the balance in your bank account will rarely ever be exactly the same, even if you keep meticulous books.

Deposits in Transit

If there are differences, such as outstanding payments or deposits in transit, they can be noted as timing differences. 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 track of outstanding checks and deposits. Most reconciliation modules allow you to check off outstanding checks and deposits listed on the bank statement.

Accounting software designed for your growth needs

There could be transactions unaccounted for in your personal financial records because of a bank adjustment. This may occur if you were subject to any fees, like a monthly maintenance fee or overdraft fee. For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period. But, you will record such transactions only in your business’ cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook.

To detect bank errors

Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month.

Check digit

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. The purpose behind preparing the bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. NSF cheques are an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement.

They also can be done as frequently as statements are generated, such as daily or weekly. For example, say ABC Holding Co. recorded an ending balance accounts payable turnover ratio definition of $500,000 on its records. After careful investigation, ABC Holding found that a vendor’s check for $20,000 hadn’t been presented to the bank.

If you use accounting software, then your reconciliation is done largely for you. However, as a business owner, it’s important to understand the reconciliation process. These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process.