Bank Reconciliation Statement: Definition, Purpose and How It Works

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bank reconciliation statement

Match the deposits in the business records with those in the bank statement. Before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement. But, you will record such transactions only in your business’ cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals.

Therefore, before closing the accounting chapter in the banking book, reconciliation checks whether the closing page hits green light i.e. ending is correct and safe. what are t accounts definition and example Once the initial check is complete, mark all items remained in the ledger. Add any transit deposits accounted in ledgers that might not appear in the bank statement.

How To Do A Bank Reconciliation: Step By Step

While it may be tempting to assume you have more money in the bank than you think, it’s a safe bet that the difference is checks and other payments made that have not yet hit the bank. Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month, weekly and even at the end of each day by businesses that have a large number of transactions.

  • If you’re interested in automating the bank reconciliation process, be sure to check out some accounting software options.
  • Without reconciling, companies may pay too much or too little in taxes.
  • The bank reconciliation also provides a way to detect potential errors in the bank’s records.
  • Note that Community Bank credits its liability account Customers’ Deposits (which includes the individual depositor’s checking account balance).
  • The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button.

Otherwise, there is a risk that cash levels may be far lower than what the accounts say, which may result in bounced checks or overdraft costs. A bank reconciliation statement is only a statement prepared to stay abreast with the bank statement; it is not in itself an accounting record, nor is it part of the double entry system. Bank reconciliation statements safeguard against fraud in recording banking transactions. They also help to detect any mistakes in cash book and bank statement. Additionally, bank reconciliation statements brings into focus errors and irregularities while dealing with the cash.

How Often Should You Reconcile Your Bank Account?

Doing them monthly after receiving the bank statements helps the financial department to close off the month and carry over the balance to the next one. So, to reconcile the amounts, you simply add the additions (interest income) and subtract the subtractions (bank charges and overdraft fees) to reach the bank balance. Ideally, the balance in your books is the same as the closing bank balance. 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). It’s common for your bank statement to have a higher ending balance than your G/L account shows.

This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. 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.

Most Common Problems In Bank Reconciliation

This is because the current account on which the cheque is drawn does not have sufficient funds to honour the cheque. In today’s world, transactions (whether receipts or payments) are done via a bank. Bank officials add money in beneficiary’s account after receiving a cheque. If you reconcile at the end of each quarter, you’ll look for the last number in the closing balance at the end of March, June, September and December. The key is to be consistent and look for the starting balance that falls on the same date across all the statements.

bank reconciliation statement

Therefore, it makes sense to first record these items in the cash book to determine the adjusted balance of the cash book. The above case presents preparing a bank reconciliation statement starting with positive bank balances. Next, check to see if all of the deposits listed in your records are present on your bank statement. Due to the reasons listed above, the closing bank balance in your books of accounts and actual bank balance as per bank will not match.

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Therefore, 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. At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook.

Example of a Bank Reconciliation Statement

If it’s a missing check withdrawal, it’s possible that it hasn’t been cashed yet or wasn’t cashed by the statement deadline. 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. After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month. This statement is used by auditors to perform the company’s year-end auditing. A bank reconciliation statement is done to make sure a company’s financial transactions and bank statements match.

If you spot any other discrepancies, review everything and make adjustments accordingly. Entries that have led to an increased bank statement or bank passbook balance are deducted from the bank statement or bank passbook balance. The bank or the account holder may make mistakes, resulting in discrepancies in the balances of the cash book and the bank statement or passbook.