Bank Reconciliation: Purpose, Example, Process

Bank reconciliation ensures that bank fees and penalties do not go unrecorded. Banks can impose charges for a variety of reasons that may not be recorded, such as late fees or insufficient funds. Bank reconciliation will ensure that these charges are properly entered into the business’s accounting records. A bank reconciliation statement is a document that itemizes adjustments to a company’s bank balance and its accounting books so that the two numbers match.

Moreover, reconciling your bank statements also ensures accuracy in bookkeeping and budgeting. It allows you to track every transaction effectively while avoiding overdraft fees, bounced checks, and other costly mistakes that could impact cash flow negatively. The first entry records a debit to the cash account and a credit to the bank reconciliation account. The second entry records a debit to the bank reconciliation account and a credit to the cash balances of any other accounts impacted by the discrepancy (e.g., Accounts Receivable or Accounts Payable).

How to Record in QuickBooks When an Owner Withdraws Cash From the Business Account

A bank reconciliation is a tool for reconciling and bridging the differences between a company’s check register (cash account) and its bank account. Because of transactions in progress, it is rarely the case that they match. To make sure the difference between the balances is merely a reflection of transactions in progress, a bank reconciliation must be conducted. This is usually done at least once every month, when the bank sends a statement. Some companies conduct daily reconciliations because this allows them to have greater control over cash flows and it has become really easy as a result of automation and internet access to banking data.

• BlackLine and our ecosystem of software and cloud partners work together to transform our joint customers’ finance and accounting processes.
• Adjusting journal entries are inputted into the business’s accounting records at the end of the accounting period to record any income or expenses identified in the bank reconciliation process.
• The opposite can also happen, i.e., you have issued a receipt but it is not reflected in the company’s accounting books.
• HighRadius Autonomous Accounting Software enables faster financial close and accurate reconciliation of bank statements and general ledger (GL) and sub-ledger.

A lot of time and resources go into account reconciliation, making it an exhaustive and error-prone process. Hence, businesses must look to improve their bank reconciliation process to make it faster and more accurate. All you need to do bank reconciliation is a copy of your business accounts and a list of bank transactions from the same time period.

Bank Reconciliation Procedure

This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook. In today’s world, transactions (whether receipts or payments) are done via a bank. However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors.

• We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site.
• You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the cheques issued but not yet presented for payment.
• The bank statement submitted by the businessman at the end of May will not contain an entry for the check, whereas the cash book will have the entry.
• It sounds mind-numbing and it can be if you’re doing it manually with paper bank statements.
• For example, if a check is altered, the payment made for that check will be larger than you anticipate.

Most banks will send your transaction data directly to online accounting software. Then you have both sets of records on the same screen and you can run through them really fast. Smart software like Xero will even suggest matches, so all you need to do is click OK. It is important to note here that adjusting the cash book balance before preparing the bank reconciliation statement reduces the number of items that cause a difference between the cash book and passbook balances. All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book.

Table of Contents

Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document. Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook. However, there may be a situation where the bank credits your business account only when the cheques are actually realised. Such a time lag is responsible for the differences that arise in your cash book balance and your passbook balance.

Following the review and comparison of your internal bank records, with those on the bank statement, you will adjust your accounting records to reflect any discrepancies or unidentified transactions. Accounts payable is responsible for sending payments to vendors and suppliers. Business owners can compare this information with the company’s cash account and bank statement, and the reconciliation process. You do it by comparing your business accounts against your bank statements. There are a broad range of bank reconciliation tools and software packages that you can use to make the entire process a little easier and reduce errors. For example, if you’re using Xero, most banks can simply send transaction data directly to your accounting software through a secure connection.

What are some things that can go wrong when reconciling accounts?

However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment. Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque.

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. Cash receipts and disbursements—which are recorded in the cash book, a subsidiary of the general ledger—will include bank deposits and withdrawals. Just as banks provide statements to record all transactions in an account, businesses record all transactions in the general ledger.

SAO does not prescribe how governments might organize their bank accounts or the corresponding accounting records. Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month, weekly and even at the end of each day by businesses that have a large number of transactions. This ensures The purpose of a bank reconciliation the integrity of the business’s financial records, and in some cases, may even identify errors on the part of the bank. Increase accuracy and efficiency across your account reconciliation process and produce timely and accurate financial statements. Drive accuracy in the financial close by providing a streamlined method to substantiate your 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. Once the journal entries are recorded, the general ledger is prepared. You first need to determine the underlying reasons responsible for the mismatch between balance as per cash book and passbook. Once you have determined the reasons, you need to record such changes in your books of accounts. Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook.

How Is Bank Reconciliation Performed?

This statement includes all transactions, such as deposits and withdrawals, from a given timeframe. Bank reconciliation is an essential aspect of financial management that involves the process of comparing your company’s accounting records with the transactions listed on your bank statement. The primary purpose of this exercise is to ensure that all financial transactions are accurately recorded, and there are no discrepancies between the two sets of data. Watch this webinar to see the Chaser platform in action, or contact our team to find out how Chaser can support your business accounting processes. From your bank reconciliation statement to checking your cash balance and bank account balance match as they should, Chaser can help. You must post the journal entries of all the adjustments made to the balance as per the cash book.

• Gain global visibility and insight into accounting processes while reducing risk, increasing productivity, and ensuring accuracy.
• Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can make the necessary corrections in your books of accounts to ensure accuracy.
• Accounts payable is responsible for sending payments to vendors and suppliers.
• It’s a good idea to use a dedicated bank account just for your business.