How to Prepare a Bank Reconciliation: 8 Steps with Pictures

Any difference that is not an unrecorded difference or a timing difference is an error. As previously mentioned, errors can occur on both sides, the bank book or the bank statement. For the business, the transaction will already have been recorded in the bank book because the cheque was why data could be your newest revenue stream issued. For the bank, because there was no cheque presented, the transaction never occurred. The differences are classified in one of these two categories based on which document, the bank book or the bank statement has the difference and the differences must be adjusted against.

• If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise!
• A bank reconciliation is a critical tool for managing your cash balance.
• If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet.
• Ideally, an AP department should reconcile the bank account every time a statement is received.
• Small business owners may find that sufficient funds from the previous month are not enough.

The more frequently you reconcile your bank statements, the easier it is each time. Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening. 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.

Step #4: Make Sure That the Balance As Per Bank Matches With the Balance As Per Cash Book

Similarly, it can also be because the preparer of the bank reconciliation has missed some expense from the bank statement. Generally, it is a good idea to prepare the bank reconciliation again and pay attention to even small amounts and not rounding off figures obtained from the bank statement. It is also a good idea to mark any expenses that have already been included in the bank reconciliation statement to avoid any errors. 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.

If you want to prepare a bank reconciliation statement using either of these approaches, you can take balance as per the cash book or balance as per the passbook as your starting point. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. The final step in the bank reconciliation process is to record journal entries to complete the balancing process. Notice that the bank reconciliation form above still does not balance, even after including the outstanding checks. This means the bank has made an adjustment to your account that has not been recorded in your G/L.

The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period. Any discrepancies lead to making necessary adjustments or corrections.

Compare Bank Withdrawals to Expenses Recorded on the Books

These adjustments that may be missing from your G/L typically include service fees, overdraft fees, and interest income. Standardizing the process with a set of steps to follow for reconciliation can make the process more organized and save time. Companies can designate several individuals to handle certain aspects of bank reconciliation, and they can complete reconciliations in a variety of ways. The basic sequence, of preparing a bank reconciliation, consists of the following eight steps. The second entry required is to adjust the books for the check that was returned from Berson.

For smaller companies, it’s common to reconcile bank statements during the monthly or quarterly close process. However, there are situations where a bank reconciliation might be necessary at the earliest. For example, if a business identifies any suspicious activity or unidentifiable transactions, it’s essential to prepare a bank reconciliation immediately. Similarly, if customer payment checks on the balance sheet do not match bank records, a cross-check is necessary.

Example of Bank Reconciliation Statement

However, the transactions that the bank is aware of but the company is not must be journalized in the entity’s records. The reconciliation statement allows the accountant to catch these errors each month. The company can now take steps to rectify the mistakes and balance its statements. In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business.

Final Check

Many banks allow you to opt for fee-free electronic bank statements delivered to your email, but your bank may mail paper bank statements for a fee. Bank reconciliation statement is a report or statement prepared by the business to match the bank transactions recorded in the books of accounts with the bank statement. The bank reconciliation statement helps to check the correctness of the entries recorded in the books of accounts and thereby, ensures the accuracy of bank balances. In the bank reconciliation process, the total amount of outstanding checks is subtracted from the ending balance on the bank statement when computing the adjusted bank balance. In this case, there is no need to adjust the business’s general ledger accounts since the outstanding checks were recorded when they were issued.

How to Prepare a Bank Reconciliation

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. 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. When you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the cheque issued on November 30 is unlikely to be cashed by the bank.

We’ll take bookkeeping completely off your hands (and deal with the bank reconciliations too). Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened. Here are two examples to reinforce the bank’s use of debit and credit with regards to its customers’ checking accounts. Plan to complete reconciliations monthly so you don’t risk accumulating a large number of discrepancies, which could be difficult to track.