Bank Reconciliation: Purpose, Example, Process

If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the perpetual inventory method definition issue. Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. The correction of the error will increase or decrease the cash account in the books.

The bank reconciliation statement explains the difference between the balance in the company’s records and the balance in the bank’s records. Preparing a bank reconciliation statement is done by taking into account all transactions that have occurred up until the date preceding the day the bank reconciliation statement is prepared. You need to determine the underlying reasons responsible for any mismatch between balance as per cash book and passbook before you record such changes in your books of accounts. Whereas, credit balance as the cash book indicates an overdraft or the excess amount withdrawn from your bank account over the amount deposited.

It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. Automation can solve the problem of time-consuming manual reconciliation and reduce errors. Cross-checking the bank statement and balance sheet can be done without human intervention using software tools. Recording transactions on the general ledger or subledger as soon as they occur helps reduce errors and makes the reconciliation process more manageable.

Ensures Financial Accuracy and Cash Flow

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. Hence, at the end of each month, the first thing to do is to consult the bank reconciliation statement prepared at the end of the previous month. One of the procedures for establishing the correct cash balance (and for controlling cash) is the reconciliation of the bank and book cash balances. When your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts.

Bank Fees

Adjust your records to match the bank statement, considering deposits, withdrawals, fees, and errors. For smaller companies, it’s common to reconcile bank statements during the monthly or quarterly close process. However, there are situations where a bank reconciliation might be necessary at the earliest. For example, if a business identifies any suspicious activity or unidentifiable transactions, it’s essential to prepare a bank reconciliation immediately. Similarly, if customer payment checks on the balance sheet do not match bank records, a cross-check is necessary. A bank reconciliation is part of the month-end close process, which includes reviewing the company’s balance sheet, income, bank statements, expenses, intercompany trades, and other information.

1. 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.
2. Bank statements also show expenses that may not have been included in financial statements, such as bank fees for account services.
3. To create a bank reconciliation, you will need to gather your bank statements and reconcile them with your accounting records (ledger).
4. To successfully complete your bank reconciliation, you’ll need your bank statements for the current and previous months as well as your company ledger.

What are the two items used to reconcile a bank account?

The first step is to obtain a detailed statement from the bank, which includes information about checks cleared and rejected by the bank, transaction charges, and bank fees. For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. 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.

Tips for Streamlining Your Bank Reconciliation Process

Similarly, some checks credited to the ledger account will probably not have been processed by the bank prior to the bank statement date. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits, and once these are recorded, the general ledger is prepared. At times, your business may either omit or record incorrect transactions for checks issued, checks deposited, or the wrong total, etc. At times, the balance as per the cash book and passbook may differ due to an error committed by either the bank or an error in the cash book of your company.