What Is a Bank Reconciliation Statement, and How Is It Done?

What Is a Bank Reconciliation Statement, and How Is It Done?

What Is a Bank Reconciliation Statement, and How Is It Done? 150 150 Juraj

bank reconciliation statement

Without preparing a timely bank reconciliation, you risk your business losing cash without you knowing. With QuickBooks Online, it’s even easier to reconcile bank accounts because you only need to tick transactions until the cleared balance matches the statement balance. Many free or low-priced accounting software doesn’t offer an adequate bank reconciliation feature. While they claim to perform bank reconciliations, they don’t allow for any timing differences between when a check is written and when it clears the bank. All they do is match your book transactions to your bank transactions and require that they be recorded in the same period.

Until then, your balance as per the cash book would differ from the balance as per the passbook. Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. Bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank. Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies. Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes.

Manage Bank Reconciliations With NetSuite

The very purpose of reconciling bank statements with your business’s cash book is to ensure that the balance as per the passbook matches the balance as per the cash book. Now, while reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. In addition to ensuring correct cash records, the bank reconciliation process also helps in keeping track of the occurrence of any form of fraud. Such insights would help you as a business to control cash receipts and payments in a better way.

bank reconciliation statement

The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies between the accounting records of the entity and the bank besides those due to normal timing differences. Such discrepancies might exist due to an error on the part of the company or the bank. 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.

Needs and Importance of Bank Reconciliation Statement

Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records. This relatively straightforward and quick process provides a clear picture of your financial health. Consider reconciling your bank account monthly, whether you set aside a specific day each month or do it as your statements arrive.

  • Bank reconciliation starts by comparing the cash a company has on its books to the cash it has on its bank statement.
  • For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period.
  • Depending on how you choose to receive notifications from your bank, you may receive email or text alerts for successful deposits into your account.
  • Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct.
  • Such discrepancies might exist due to an error on the part of the company or the bank.

You need to deduct the check amounts from your bank balance to decrease it so that it reflects the balance of your cash book. Bank reconciliation is the process of comparing and matching the business vs personal expenses: how to know what’s deductible internal financial records with the bank records. Before sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements.

After fee and interest adjustments are made, the book balance should equal the ending balance of the bank account. A hypothetical San Francisco home contractor, By the Bay Contracting, is doing a reconciliation at the end of January. By the Bay’s bank account shows $106,800 but there is $120,000 in cash on the company’s books. The company reflected the payment it received from debtors in its cashbook, but the payment hasn’t yet reflected in the bank account.

What is a checking account?

The first step is for a company to compare its bank account statement with its bookkeeping record. Step two is to adjust the bank account balance and step three is to adjust the balance on the company’s books. For companies with high transaction volumes, multiple bank accounts or multiple currencies, bank reconciliation can be a time-consuming process. NetSuite Cash Management can automate a crucial part of this process — the manual comparison of bank data with companies’ accounting system data.

  • However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded.
  • If done regularly, a bank reconciliation easily helps you identify discrepancies so that you can adjust them.
  • This is accomplished by scanning the two sets of records and looking for discrepancies.
  • First, we see a deposit of $700 from Kristen Berman in the bank statement that isn’t recorded in the check register.

As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book. NSF cheques are an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month. There could be transactions unaccounted for in your personal financial records because of a bank adjustment.

Bank Reconciliations Defined: A Definitive Guide

Reconciling bank balances monthly is an important internal control over cash. Before you start reconciling bank accounts, get your bank statement, check register, and previous bank reconciliation statement first. A bank reconciliation is a critical tool for managing your cash balance.

If you look at the check register below, we see the same deposit recorded on June 14. Now, let’s do the same process for the cash deposit of $1,500 and the $700 deposit by Kristen Berman. Bank statements are commonly routinely produced by the financial institution and used by account holders to perform their bank reconciliations. If you detect incorrect amounts or an omission in your books, you also need to correct those transactions so your records match the bank statements. You need to make sure that all the deposits you’ve recorded in the books reflect in the bank statement. Match each deposit from the debit side of your record to the credit side on the bank statements while ensuring that the amounts correspond.

The resultant figure in the cash book should be equal to the bank statement balance. Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both sides mentioned at the bottom match. 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. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly.

So the company’s accountant prepares an entry increasing the cash currently shown in the financial records. After adjustments are made, the book balance should equal the ending balance of the bank account. A bank reconciliation statement is a document that itemizes adjustments to a company’s bank balance and its accounting books so that the two numbers match.

Consider performing this monthly task shortly after your bank statement arrives so you can manage any errors or improper transactions as quickly as possible. 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. Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records. Interest is automatically deposited into a bank account after a certain period of time.

Here, you only need to adjust the bank statement balance to arrive at the check register balance. While this format is easy, the bank-to-book format won’t show the equality of bank balances. The cash deposit of $1,500 with reference number 2298 is present in our cash register. However, there are a couple of items in the bank statement and check register that need to be addressed. First, we see a deposit of $700 from Kristen Berman in the bank statement that isn’t recorded in the check register.

You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees.

NetSuite users can automatically import bank data, saving time and improving accuracy. For instance, the MD Restaurant Group, a chain based in Illinois, is using NetSuite’s bank reconciliation functionality to compare financials from 19 different entities. Basically, what you’re doing here is recording a change to the cash accounts in your general ledger. The bank account balance will adjust naturally as the transactions you identified in the second step move through the banking system.

Two other tips are to automate those aspects of bank reconciliation that you can, and to close bank accounts that don’t have a lot of activity, so you aren’t doing small reconciliations. One way to become familiar with the process of bank reconciliation is to work through a basic example. As downloaded, it will reflect the reconciliation numbers described in the By the Bay Contracting example described above, but with additional rows for further adjustments. You can change the numbers to reflect examples from your organization’s statements and books, and add rows as needed (but don’t forget to adjust the provided formulas). Divvy and its affiliates do not provide tax, legal or accounting advice. This material  has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal or accounting advice.