Bank Reconciliation: How Does a Bank Reconciliation Work?

For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality.

When you “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy. Then, you make a record of those discrepancies, so you or your accountant can be certain there’s no money that has gone “missing” from your business. To keep your financial records in check, start by comparing your cash book with the bank statement, paying special attention to check issuances. If an outstanding check of the previous month clears the bank, it means the bank paid the check and the check will appear as a deduction on the statement.

• It’s convenient to do this at the end of each month because that is when banks send monthly statements, which can be used as the basis for reconciliation.
• As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits.
• To efficiently locate outstanding checks, begin by isolating the cleared checks.
• The $1,565 credit memorandum requires a compound journal entry involving four accounts.

On the bank side of the reconciliation, you do not need to do anything else except contact the bank if you notice any bank errors. On the book side, you will need to record journal entries for each of the reconciling items, because those are transactions you forgot to record in September during your regular bookkeeping process. It may not be your favorite pastime, but keeping an eye on your bank statements and accounting software is what smart business owners do. Carve out time to reconcile your bank account regularly, and your financial headaches will all but vanish. Even after accounting for outstanding checks, it’s possible for your bank and book balance to still not be in sync.

The Importance of Business Development In a Small Business

Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque. This is because the current account on which the cheque is drawn does not have sufficient funds to honour the cheque. For a different perspective and chance to practice simple bank reconciliations, click Banking Practice. Now make sure each journal entry in your software is properly categorized.

• 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.
• The statement also includes bank charges such as for account servicing fees.
• On the company side, you require the company’s cashbook, which records both incoming and outgoing transactions.
• Once you post the journal entries into your company ledger accounts, make sure that the cash account balance is equal to the adjusted balance per cash book shown in the bank reconciliation statement.
• These checks represent funds that have been deducted from your account when issued, but they are still pending and have not yet been reflected on your bank statement.

Sum up the value of these checks to determine the total outstanding amount. Let’s examine a more complicated (and therefore more realistic) example of reconciling the GL to the bank. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

Cheques Issued by the Bank But Not Yet Presented for Payment

The outstanding checks should be reflected as a deduction from your cash balance on the balance sheet. Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits.

Cheques Deposited or Bills Discounted Dishonored

Since the Vector Management Group paid Ad It Up $63 more than the books show, a $63 debit is made to decrease the accounts payable balance owed to Ad It Up, and a $63 credit is made to decrease cash. Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank.

Accounting Principles I

The credit portion of the entry will likely be to the account that was originally debited when the check was issued. The check that was voided is also removed from the list of outstanding checks. Adjust your balance sheet by deducting the total amount of outstanding checks from the reported cash balance (if not yet recorded in the books). Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, every week, or even at the end of each day in case of businesses having a huge number of transactions. 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.

Why Bank Reconciliation Matters

The next step is to adjust the cash balance in the business account. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data.

Since the NSF check has previously been recorded as a cash receipt, a journal entry is necessary to update the company’s books. Therefore, a $345 debit is made to increase what happens if you don’t file your taxes the accounts receivable balance of Hosta, Inc., and a $345 credit is made to decrease cash. Match the deposits in the business records with those in the bank statement.