How to Do a Bank Reconciliation: Step-By-Step Process

They can also be done as frequently as statements are generated. Reconciling bank statements also helps to identify errors that affect tax reporting. Without reconciling, companies may pay too much or too little in taxes.

how to reconcile a bank statement

Adjustments are made to each so that the two figures match, and the company has an accurate picture of its cash position and all cash transactions for the period. The balance of the cash account in an entity’s financial records may require adjusting as well. For instance, a bank may charge a fee for having the account open. The bank typically withdraws and processes the fees automatically from the bank account. Therefore, when preparing a bank reconciliation statement, any fees taken from the account must be accounted for by preparing a journal entry. A bank reconciliation statement is a summary of banking and business activity prepared by a company or individual.

Understanding the Bank Reconciliation Statement

But banks still hold the overwhelming majority of business accounts and companies can use the same basic process they use in bank reconciliation to pinpoint their cash positions elsewhere. Some differences in timing are normal and expected, such as deposits in transit and outstanding checks. Deposits in transit are amounts received by your business and recorded in your books that haven’t yet been recorded by the bank. Outstanding checks have been issued by your business but haven’t cleared the bank yet. The same thing can happen with electronic fund transfers initiated at the end of the month. Bank reconciliation statements are often used to catch simple errors and accidental discrepancies.

This often happens when the checks are written in the last few days of the month. Add or subtract all reconciling items from the bank’s ending cash balance for your account, and compare the result to your own record of the ending cash balance. If the two numbers do not match, it is possible that the beginning balances of these two numbers also did not match, in which case you should reconcile the bank statement for the preceding period. Otherwise, there is still a reconciling item within the current period that you have not yet identified.

Bank reconciliations are an important tool in cash-flow management and are usually handled by an accounting department or a business owner. The accountant calculates that the bank account balance is going to end up at $119,800 once it includes the $13,000 of deposits in transit. At the same time, the cash balance of $120,000 on the company’s books will go down by the $200 in bank fees. She creates a bank reconciliation statement that itemizes both the $200 in unrecorded bank fees and the $13,000 in outstanding deposits. The first is comparing the cash balances and transactions on the company’s books to the cash balances and transactions listed on an external bank statement.

The following tips, however, can be applied to any organization’s bank reconciliations. Companies can assign different people to handle different parts of a bank reconciliation and can complete reconciliations in a number of different ways. The basic sequence, however, consists of the following six steps.

how to reconcile a bank statement

Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match.

How to Do Bank Reconciliation?

This is why you’re doing bank rec, and there’s often a straightforward explanation. Those payments are recorded in your G/L, but they have yet to hit the bank. You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t cleared. It’s common for your bank statement to have a higher ending balance than your G/L account shows.

A bank reconciliation statement is a useful internal tool used to detect and avoid financial fraud. 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. NetSuite users can automatically import bank data, saving time and improving accuracy.

  • Put a check mark next to each check in your check register that matches the checks listed on the bank statement.
  • Don’t underestimate the importance of this very important tool.
  • They can also be done as frequently as statements are generated.

Similarly, the bank too keeps an account for every customer. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals.

Step 3: Compare checks and adjust bank total

Thus, the accountant may need to prepare an entry that increases the cash currently shown in the financial records. After all adjustments are made to the books, the balance should equal the ending balance of the bank account. If the figures are equal, then a successful bank reconciliation statement has been prepared.

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Examples of miscellaneous items are fees for bounced checks, overdraft charges, account maintenance fees, and charges for additional check stock ordered by you. Completing a bank reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records. The process can help you correct errors, locate missing funds, and identify fraudulent activity. Bank reconciliation is the process that companies use to make sure that the cash balances they show on their books matches the actual cash they have in the bank.

Bank reconciliation steps

Non-sufficient funds (NSF) checks are recorded as an adjusted book balance line item on the bank reconciliation statement. Bank reconciliation statements also help identify errors that could adversely affect financial reporting. Financial statements show the health of a company or entity for a specific period or point in time. Accurate financial statements allow investors to make informed decisions and give companies clear pictures of their cash flows. The statement outlines the deposits, withdrawals, and other activities affecting a bank account for a specific period.

  • If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money.
  • You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
  • The next step is to adjust the cash balance in the business account.
  • The balance of the cash account in an entity’s financial records may require adjusting as well.

One of your payments may not have cleared yet, or maybe you paid using cash or a different account. This includes things like bank fees, which you might not have accounted for yet. The next step is to adjust the cash balance in the business account. To do this, a reconciliation statement known as the bank reconciliation statement is prepared. You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee. Best practices in bank reconciliation vary from business to business, especially as a company grows and its operations become more complex.

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

Before the reconciliation process, business should ensure that they have recorded all transactions up to the end of your bank statement. Businesses that use online banking service can download the bank statements for the regular reconciliation process rather than having to manually enter the information. Adjust the balance on the bank statements to the corrected balance. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors.

Resources for Your Growing Business

Match each of the deposits in your records to those noted on the bank statement. If you have recorded a deposit that the bank had not yet received during the month, list this deposit as a reconciling item that should be added to the bank’s ending cash balance for your account. Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits. Don’t underestimate the importance of this very important tool.

To successfully complete your bank reconciliation, you’ll need your bank statements for the current and previous months as well as your company ledger. An online template can help guide you, but a simple spreadsheet is just as effective. After you’ve checked all the deposits and withdrawals, your business bank balance should match the totals in your business accounts. This will be the starting point for your next reconciliation. Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there.