Bank Reconciliation: Purpose, Example, Process


bank reconciliation steps

After careful investigation, ABC Holding found that a vendor’s check for $20,000 hadn’t been presented to the bank. It also missed two $25 fees for service charges and non-sufficient funds (NSF) checks during irs announces 2014 retirement plan contribution limits for 401 the month. Bank reconciliation statements are effective tools for detecting fraud, theft, and loss. For example, if a check is altered, the payment made for that check will be larger than you anticipate.

bank reconciliation steps

Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors. Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button.

Errors Made by Your Business or your Bank

Therefore, the bank needs to add back the cheque’s amount to the bank balance. Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits.

After you’ve checked all the deposits and withdrawals, your business bank balance should match the totals in your business accounts. Prior to reconciliation, a company should make sure all transactions have been recorded up to the end of the bank statement. Especially if the accounting department has to chase paperwork and approvals. In Step 2, we ticked all the transactions we see in both the bank statement and QuickBooks Online’s check register. Now, our goal is to match the checks in the check register with those in the bank statements.

  • Once both these documents are available, the following steps must be followed to prepare a bank reconciliation statement.
  • They include the internal bank records of the company (the cash book) and the Bank Statement of the company.
  • These might be either due to unrecorded differences or timing differences.

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. To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting. Bank errors are mistakes made by the bank while creating the bank statement.


Note that this process is exclusively for reconciliations performed by hand. 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. There are times when the bank may charge a fee for maintaining your account. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account. In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business.

bank reconciliation steps

Make sure to choose the checking account you want to see and set the report period. However, the bank service charge of $10 in our bank statement doesn’t appear in our check register. The bank service charge is erroneously omitted from the books, so it should be added to the check register.

Regular and accurate reconciliations are essential for businesses and individuals alike to ensure that their financial data is reliable and free from errors or discrepancies. With the introduction of technology, business owners and employees are now able to log on to their banks’ website and generate a statement showing current transactions anytime during the month. This allows for the reconciliation process to begin earlier in the month depending on the number of transactions passing through the bank account. Bank Errors are mistakes made by the bank that were discovered when the company prepared the bank reconciliation.

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For errors in the bank statement, the bank is contacted and details are given about the transaction. Transactions in the bank statement are presented the opposite of transactions in a bank book. For example, a receipt will be a Debit in the bank book while it will be presented as a Credit in the bank statement.

  • These are mainly outstanding cheques and transfers done closer to the end of the month but is yet to be processed by the bank.
  • As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits.
  • Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column.
  • To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another.

But, the cheque has not yet been cleared by the bank as a deduction from the company’s cash balance. 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. All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book.

How to do a bank reconciliation

Most business accounts are set up to run monthly, though some older accounts may have a mid-month end date. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals. The deposit could have been received after the cutoff date for the monthly statement release.

Such cheques 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. However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences. You will know about such information only when you receive the bank statement at the end of the month. At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account. However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment.

Data entry error

For instance, the bank charged your business $30 in service fees, but it also paid you $5 in interest. The easiest way to find these adjustments when completing a bank reconciliation is to look at the bank fees. You’ll also want to look at any miscellaneous deposits that haven’t been accounted for.