How To Do A Bank Reconciliation: Step By Step

When you do a bank reconciliation, you first find the bank transactions that are responsible for your books and your bank account being out of sync. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account, and plan how you collect and spend money accordingly. When you “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy.

Step 5: Record All Adjustments As Per Cash Book Into Your Company’s General Ledger Cash Account

The bank reconciliation statement explains the difference between the balance in the company’s records and the balance in the bank’s records. 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 nonprofit quarterly npq longer, but more detailed). 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. Whether this is a smart decision depends on the volume of transactions and your level of patience.

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. 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. 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. There will be very few bank-only transactions to be aware of, and they’re often grouped together at the bottom of your bank statement. Michelle Payne has 15 years of experience as a Certified Public Accountant with a strong background in audit, tax, and consulting services.

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They also explain any delay in the collection of cheques, and they identify valid transactions recorded by one party but not the other. Banks often record other decreases or increases to accounts and notify the depositor by mailed notices. With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.

1. 11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links.
2. Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet.
3. A bank reconciliation statement is a document that compares the cash balance on a company’s balance sheet to the corresponding amount on its bank statement.
4. She has more than five years of experience working with non-profit organizations in a finance capacity.

This includes everything from major fraud and theft to accounting miscalculations, insufficient funds, and incomplete or duplicated payments. By markdown vs markup comparing the two statements, Greg sees that there are $11,500 in checks for four orders of lawnmowers purchased near the end of the month. 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.

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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. Finally, compare your adjusted bank balance to your adjusted book balance. Since you’ve already adjusted the balances to account for common discrepancies, the numbers should be the same. To do this, businesses need to take into account bank charges, NSF checks, and errors in accounting. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank.

Preparing a Bank Reconciliation Statement

When your business receives checks from its customers, these amounts are recorded immediately on the debit side of the cash book so the balance as per the cash book increases. 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. 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. These outstanding deposits must be deducted from the balance, as per the cash book, in the bank reconciliation statement.

Regular bank reconciliation saves you from having to review a full year of financial records—instead, you can quickly consult your reconciliation statements to review any required information. Outstanding checks are those that have been written and recorded in the financial records of the business but have not yet cleared the bank account. This often happens when the checks are written in the last few days of the month. The more frequently you do a bank reconciliation, the easier it is to catch any errors. Many companies may choose solvency definition to do additional bank reconciliations in situations that involve large sums of money or that show unusual financial activity.

You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. 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). Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.