Bank Reconciliation: Purpose, Example, Process

If not, you’re most likely looking at an error in your books (or a bank error, which is less likely but possible). If you suspect an error in your books, see some common bank reconciliation errors below. After including all the amounts identified in Step 3, your statements should display the same final balance. If any discrepancies cannot be identified and reconciled, it may signal an error or risk of fraud which your company can investigate further. Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix.

Add bank-only transactions to your book balance

They are helpful when reconciling accounts to print statements, clearing errors, etc. They can also be helpful when reconciling accounts for pulling reports.Another example would be where you deposit cash, but the teller doesn’t post it correctly. You have to go back and compare your records with the bank’s to try and figure out what went wrong so you can correct your records to match the banks. Additionally, bank reconciliation statements brings into focus errors and irregularities while dealing with the cash.

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. 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. There are times when your business will deposit a check or draw a bill of exchange discounted with the bank.

1. An online template can help guide you, but a simple spreadsheet is just as effective.
2. It is important to note that it takes a few days for the bank to clear the checks.
3. If you find any errors or omissions, determine what happened to cause the differences and work to fix them in your records.
4. Auto-reconciling transactions reduces human errors, such as keying inaccuracies and adds security to the reconciliation process.
5. To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another.

The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash. They might reconcile on a daily basis to make sure everything matches and all cash receipts hit the bank account.

What are the three methods of preparing bank reconciliation?

If you’ve been charged a fee in error, contact your bank to resolve the issue. Cash management software allows businesses to gather real-time cash positions across the organization, helping to make better business decisions based on accurate data. Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the bookkeeping to run your business records. The correction of the error will increase or decrease the cash account in the books. After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation.

Identify errors with check deposits

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 cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement.

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When they draw money from your account to pay for a business expense, they could take more than they record on the books. After adjusting the balance as per the cash book, you’ll need record all adjustments in your company’s general ledger accounts. Ideally, you should run a reconciliation each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, each week, or, if your business has a large number of transactions, they may even send one at the end of each day.

If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below). If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you. 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.