More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February). 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. All of this can be done by using online accounting software like QuickBooks, but if you are not using accounting software, you can use Excel to record these items. However, there can be situations where your business has overdrafts at the bank, which is when a bank account goes into the negative as a result of excess withdrawals. Not-sufficient funds (NSF) refers to a situation when your bank does not honour a check, because the current account, on which the check is drawn, has insufficient funds.
Banks take time in clearing checks, so the bank needs to add back the check’s amount to the bank balance. 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. As a result of these 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. This means that the company’s bank balance is greater than the balance reflected in the cash book. Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting.
Adjustments to the Cash Account
Reconciling bank statements with cash book balances helps your business know the underlying causes of these balance differences. Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can then make the necessary corrections in your books to ensure accuracy. Check the balances of the time value of money dictionary definition bank statements and the cash balance in your books after you’ve adjusted all the transactions and compared them. If not, there may be checks outstanding or deposits in transit or you may need to perform another reconciliation. Keeping accurate financial statements is the easiest way to simplify your bank reconciliation process.
- These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement.
- If transactions on the bank statements are correct, you need to adjust your books.
- Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet.
- They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding.
The balance recorded in the passbook or the bank statement must match the balance reflected in the customer’s cash book. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly.
6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
You need to make sure that all the deposits you’ve recorded in the books reflect in the bank statement. Match each deposit from the debit side of your record to the credit side on the bank statements while ensuring that the amounts correspond. Check your ledger’s recorded deposits, withdrawals and cleared checks against those listed on the bank statement. Everything listed on the bank statement should be included in your records and vice versa. Keeping on top of your bank reconciliation ensures that you’re always aware of your company’s financial situation. This helps you anticipate any cash flow challenges so you can respond appropriately.
The analytics review approach can also reveal fraudulent activity or balance sheet errors. In this case, businesses estimate the amount that should be in the accounts based on previous account activity levels. When your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts. Ideally, 257 budget categories to help you think of every expense you should run a reconciliation each time you receive the statement from your bank.
The Benefits of Reconciling Your Bank Account
Bank accounts for businesses can involve thousands of transactions per month. Due to the number of ongoing transactions, an organization’s book balance for its checking account rarely is the same as the balance that the bank records reflect for the entity at any given point. These timing differences are typically caused by the fact that there will be some transactions that the organization is aware of before the bank, or transactions the bank is aware of before the company.
Helpful Tips for Bank Reconciliation Adjustments
If they are still not equal, you will have to repeat the process of reconciliation. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. 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. In a small business, that responsibility usually falls to the owner (or a bookkeeper, if you hire one. If you don’t have a bookkeeper, check out Bench). Reconciling your bank statement can help you avoid bounced checks (or failing to make electronic payments) to partners and suppliers. In addition, there may be cases where the bank has not cleared the checks, however, the checks have been deposited by your business.
In your ledger balance, be sure to account for deposits that have yet to clear, as well as checks you’ve written that have yet to be cleared by the bank. The end result is the adjusted cash balance, which ensures your ledger balance matches the bank statement balance. Before sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements. You can get a template online to use for what are trade receivables your bank reconciliation statement, or you can use a spreadsheet. The bank reconciliation is an internal document prepared by the company that owns the checking account.
