To create a bank reconciliation, you will need to gather your bank statements and reconcile them with your accounting records (ledger). A bank reconciliation statement is a document what is the difference between capitalizing and expensing that is created by the bank and must be used to record all changes between your bank account and your accounting records. It shows what transactions have cleared on your statement with the corresponding transaction listed in your journal. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly.
Step three: Recording the reconciliation
These outstanding deposits must be deducted from the balance, as per the cash book, in the bank reconciliation statement. In cases where you discover discrepancies that cannot be explained by your financial statements, it’s best to contact your bank. It’s possible that a banking error has occurred or that you have been charged for something you were unaware of. If the charges are not from your bank, the bank can also help you identify the source so that you can prevent any fraud or theft risk.
Step 2. Compare Deposits
FreshBooks accounting software helps you track income and expenses and generate reports and financial statements. Try FreshBooks for free to streamline your tax preparation and bank reconciliations today. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match.
The company can now take steps to rectify the mistakes and balance its statements. Finally, compare your adjusted bank balance to your adjusted where’s my amended return book balance. Since you’ve already adjusted the balances to account for common discrepancies, the numbers should be the same. After adjusting the balance as per the cash book, you’ll need record all adjustments in your company’s general ledger accounts. You’ll need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or any checks issued that have not yet been presented for payment. 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.
Add bank-only transactions to your book balance
This is an important fact because it brings out the status of the bank reconciliation statement. Since these items are generally reported to the company before the bank statement date, they seldom appear on a reconciliation. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February). Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control.
- 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.
- He is the founder of the award-winning blog, Family Money Adventure, and host of the Family Money Adventure Show podcast.
- 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.
Adjusting Discrepancies Between Books and Bank
Once you have identified all the differences between the two statements, identify the source of the discrepancy. Begin with a side-by-side comparison of your bank account statement and your company’s accounting records. Check that your financial transaction records include all payments and deposits for the transaction period, as well as the final balance. A bank reconciliation compares a company’s cash accounting statements against the cash it has in the bank. A bank reconciliation is used to detect any errors, catch discrepancies between the two, and provide an accurate picture of the company’s cash position that accounts for funds in transit. Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records.
Whether this is a smart decision depends on the volume of transactions and your level of patience. We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you). When they draw money from your account to pay for a business expense, they could take more than they record on the books. In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period.
As such, exact amounts may not be accurately included on financial statements before the reconciliation process. When the business receives its bank statement, it can use the final amounts of interest and investment income to make adjustments and reconcile its financial statements. Conducting regular bank reconciliation helps you catch any fraud risks or financial errors before they become a larger problem.
Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates. 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 required fundraising disclosure statements software. You should perform monthly bank reconciliations so you can better manage your cash flow and understand your true cash position.