Bank Reconciliations Defined: A Definitive Guide

If you haven’t been using bank reconciliation statements, now is the best time to start. A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.

If you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information. In such a case, your bank has recorded the receipts in your business account at the bank. As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book. As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement. Compare your personal transaction records to your most recent bank statement.

Interest and Dividends Collected by the Bank

As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals. When done frequently, reconciliation statements help companies identify cash flow errors, present accurate information to investors, and plan and pay taxes correctly. They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding. Bank reconciliation statements are tools companies and accountants use to detect errors, omissions, and fraud in a financial account. Bank reconciliation is a simple and invaluable process to help manage cash flows.

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). Another possibility that may be causing problems is that the dates covered by the bank statement have changed, so that some items are included or excluded.

Summary: Bank reconciliation is a critical part of your accounting process

In this step, you will compare your cash book and internal accounting records with those on the bank statement. Look for any differences in amounts, dates, or checks that have been written but may not appear on the bank statement. Once What is bank reconciliation the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced.

Adjustments are also made to the book balance, like adding interest earned and subtracting bank service charges. After all the adjustments, the bank balance is $10,500, and the book balance is $9,850. The $650 difference must be investigated and fixed by comparing the bank statement balance with the company’s records. Bank reconciliation is the process of comparing your company’s bank https://www.bookstime.com/articles/how-to-calculate-accrued-vacation-pay statements to your own records, ensuring all transactions are accounted for. An effective bank reconciliation process can identify any discrepancies in your company’s records, and help prevent fraud and theft from your bank account. Reconciling your bank statements is important because it ensures that your financial records accurately reflect your actual bank account balance.