Bank Reconciliation: How It Works and Why Its Important?

If you’re working for yourself, you (or your accountant or bookkeeper) will perform bank reconciliation. But if multiple people handle your business’s finances, the person reconciling the accounts should probably be different from the person signing the checks. In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time. Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same.

• You should perform bank reconciliation at least every month—which is how often your bank sends a bank statement.
• These are checks that you have written and recorded in your checkbook but have not yet cleared the bank.
• This is done by comparing the company’s recorded amounts with the amounts shown on the bank statement.
• During the bank reconciliation process, you’ll compare your bank statements to your business’s financial records.
• If left to build up for too long, errors and discrepancies can build up and may start to impact your business and cash flow.

Specifically, you’ll want access to the general ledger and cash book, which records your cash and bank transactions. Compare each bank transaction to the corresponding transaction as recorded in your general ledger, ensuring the documents match. Bank reconciliation is an accounting procedure designed to ensure that the balances and transactions recorded in the company’s books match the details provided by the bank. Bank reconciliations can be challenging and time-consuming, leading to various problems that individuals and businesses may encounter. The goal of creating a bank reconciliation statement is to ensure that the cash records of your business are correct, and the bank balance is equal to the balance in your financial records.

Drawbacks of manual bank reconciliations

This process involves comparing and checking bank statements with the company’s accounting records, such as the company’s own ledgers and even invoices and other financial documents. It is therefore a practice that every entrepreneur should adopt when starting a company. A bank reconciliation is important because it gives you a true view of your business’s financial state. You can catch discrepancies such as bank service fees or interest income that you may have missed before. However, if discrepancies are discovered when reconciling the bank account, it’s important to investigate and find out where the money went.

• On the other hand, a small online store—one that has days when there are no new transactions at all—could reconcile on a weekly or monthly basis.
• Bank reconciliation is the process of matching entries (e.g., customer payments, bank fees, etc.) on the company’s cash books with the corresponding data on its bank statements.
• In most business settings, the task of conducting bank reconciliations typically falls on the shoulders of the accounting department.
• Companies need to reconcile their accounts to prevent balance sheet errors, check for possible fraud, and avoid adverse opinions from auditors.
• Bank reconciliations highlight discrepancies, potentially unearthing fraudulent actions as they happen.

Performing the bank reconciliation process on a regular basis helps ensure the integrity of the company’s financial records and enables more effective financial management. It is therefore a vital tool for making informed decisions and operating effectively in the marketplace. Data entry errors often occur due to manual input mistakes or software issues, leading to significant discrepancies. Timing differences can arise when transactions are recorded in the company’s books and the bank statement at different times. Doing regular bank reconciliation helps businesses make better decisions about their money.

If you’re using cash accounting, it means you record every transaction simultaneously with the bank, so there can’t be any miscalculations and thus no need for reconciliation. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits). Bank Example 1 showed that the bank credits the depositor’s checking account to increase the depositor’s checking account balance (since this is part of the bank’s liability Customers’ Deposits). Next, we look at how a bank uses debit and credit when referring to a company’s checking account transactions. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed). When you record the reconciliation, you only record the change to the balance in your books.

Bank reconciliation can be a tedious process, and many companies use an automated solution to help them with this process. Whether manual or automatic, however, the company’s controller should regularly carry out bank reconciliation using the steps below. In the Bank reconciliation screen, you can view the following records on the statement date, statement balance, uncleared deposits, uncleared withdrawals, and the difference between the accounts.

To do this, a reconciliation statement known as the bank reconciliation statement is prepared. Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis. Bank reconciliation also helps you identify fraud or theft and intervene early.

Example of a Bank Reconciliation Statement

This process serves the purpose of effectively managing and monitoring cash flow within the company. By diligently performing bank reconciliations, businesses can maintain accurate financial records and gain valuable insights into their financial position. A bank reconciliation should be completed at regular intervals for all bank accounts, to ensure that a company’s cash records are correct. Otherwise, it may find that cash balances are much lower than expected, resulting in bounced checks or overdraft fees. A bank reconciliation will also detect some types of fraud after the fact; this information can be used to design better controls over the receipt and payment of cash.

Preparing a Bank Reconciliation Statement

It could be that a cheque never cleared or was cashed illegally, for example. Comparing deposits during a bank reconciliation is crucial to maintain financial accuracy and prevent potential overdrawn accounts. This process helps to ensure all recorded transactions match your bank statement. Companies need to reconcile their accounts to prevent balance sheet errors, units of production method check for possible fraud, and avoid adverse opinions from auditors. Companies generally perform balance sheet reconciliations each month, after the books are closed for the prior month. This type of account reconciliation involves reviewing all balance sheet accounts to make sure that transactions were appropriately booked into the correct general ledger account.

HighRadius’ Account Reconciliation software helps you leverage an out-of-the-box matching rule system, and analyze large volumes of data with accuracy, thereby reducing reporting errors. The entries in the entity’s books to rectify the discovered discrepancies (except for the outstanding cheques) would typically be made in a subsequent date or period, not backdated. When cheques become stale (ie., out of date), they would typically be reversed, not cancelled. In other words, the adjusted balance as per the bank must match with the adjusted balance as per the cash book.

Identifying Accounting Errors

As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book. 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. 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. The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer.

Step 5: Updating Internal Records and Bank Statement

Bank reconciliation gets much trickier if you use the same account for business and personal transactions. Bank account reconciliation is a critical part of maintaining accurate financial reports that will ensure smooth functioning of the business. Now, we know performing a reconciliation every single day can be time-consuming and costly to implement, hence, it’s recommended that all businesses do a bank reconciliation once a month. Frequent bank reconciliations help you spot these types of errors, stay on top of your receivables, and make sure your outstanding invoices and bad debt expenses don’t spiral out of control.

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Keeping accurate records of your bank transactions can help you determine your financial health and avoid costly fees. Using this simple process each month will help you uncover any differences between your records and what shows up on your bank statement. Reconciling items are discrepancies between your records and the bank statement.

You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality. In a small business, that responsibility usually falls to the owner (or a bookkeeper, if you hire one. If you don’t have a bookkeeper, check out Bench). Since both the company’s books and the bank statement have an adjusted balance of $6,975 the bank statement has been reconciled. Another possibility that may be causing problems is that the dates covered by the bank statement have changed, so that some items are included or excluded.