Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly. When it comes to optimizing accounts payable management, reconciling your bank account is critical to staying on track. If you don’t ensure the business and bank are on the same page, tiny mistakes can snowball into huge problems.
This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same.
- In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side.
- If you’ve been charged a fee in error, contact your bank to resolve the issue.
- Those payments are recorded in your G/L, but they have yet to hit the bank.
- 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, the bank book is an important document in the accounting process of a company.
- It’s common for your bank statement to have a higher ending balance than your G/L account shows.
Accurate financial statements allow investors to make informed decisions. The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates. The easiest way to find these adjustments when completing a bank reconciliation is to look at the bank fees. You’ll also want to look at any miscellaneous deposits that haven’t been accounted for.
First off, what is bank reconciliation?
Business owners regularly compare their records with bank transactions to ensure there are no errors. It is a best practice to check that their balance sheet numbers are accurate and match the bank statement. If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet. Bank reconciliation plays a crucial role in the internal control process of a company and helps in detecting fraud and error in the process. When preparing a bank reconciliation, the company must look for two types of differences, timing and unrecorded differences. Preparing bank reconciliation requires companies to follow a 5-step process.
- 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.
- Therefore, there are a few steps that need to be carried out to ensure that proper bank reconciliation has been carried out.
- After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same.
- This may occur if you were subject to any fees, like a monthly maintenance fee or overdraft fee.
- The firm’s account may contain a debit entry for a deposit that was not received by the bank prior to the statement date.
It is helpful for a company to have a separate general ledger Cash account for each of its checking accounts. For instance, a company will have one Cash account for its main checking account, a second Cash account for its payroll checking account, and so on. For simplicity, our examples and discussion assume that the company has only one checking account with one general ledger account entitled Cash. There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them. Auto-reconciling transactions reduces human errors such as keying inaccuracies and adds security to the reconciliation process. Automating bank reconciliation can bring numerous benefits to a business, including increased accuracy, productivity, and cost savings.
How Frequently Should You Reconcile Your Bank Account?
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. 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.
Inspection of internal banking records
The entries in the statement stop being the cause of discrepancies after a few days. The bank balance on September 30 is $27,395 but according to our records, the ending cash balance is $24,457. We need to do a bank reconciliation to find out why there is a difference. When a company writes a check, the gross profit ratio gross profit equation company’s general ledger Cash account is credited (and another account is debited) using the date of the check. Therefore, a check dated June 29 will be recorded in the company’s accounts using the date of June 29, even if the check clears (is paid through) the company’s bank account one week later.
Bank Reconciliation
Keep in mind, a bank account is an asset to the company BUT to the bank your account is a liability because the bank owes the money in your bank account to you. For this reason, in your bank account, deposits are credits (remember, liabilities increase with a credit) and checks and other reductions are debits (liabilities decrease with a debit). The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank’s records.
Adjust the general ledger by deducting all bank charges incurred during the month. In these cases, bank reconciliation might not necessarily be drawn since it is a relatively immaterial difference. In this regard, it is highly important to establish proper communication channels, so that companies can communicate with the bank, and settle any differences.
How confident are you in your long term financial plan?
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. However, there may be a situation where the bank credits your business account only when the cheques are actually realised. When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book. The above case presents preparing a bank reconciliation statement starting with positive bank balances. After adjusting all the above items, what you get is the adjusted balance as per the cash book.
Once deposited, checks may take several days to clear the banking system. Determine the outstanding checks by comparing the check numbers that have cleared the bank with the check numbers issued by the company. Use check marks in the company’s record of checks issued to identify those checks returned by the bank. Checks issued that have not yet been returned by the bank are the outstanding checks.
(f) The cash book does not contain a record of bank charges, $70, raised on 31 May. Examples include deposited checks returned for non-sufficient funds (NSF) or notes collected on the depositor’s behalf. In the case of items in transit, these arise from several circumstances. The firm’s account may contain a debit entry for a deposit that was not received by the bank prior to the statement date. One of the procedures for establishing the correct cash balance (and for controlling cash) is the reconciliation of the bank and book cash balances.