How To Do A Bank Reconciliation: Step By Step

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. In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period. It’s important to perform a bank reconciliation periodically to identify fraudulent activities or bookkeeping and accounting errors. This way, you can ensure your business is in solid standing and never be caught what is the indexation definition off-guard. Book transactions are transactions that have been recorded on your books but haven’t cleared the bank.

Step 2: Compare deposits

As a small business, you may find yourself paying vendors and creditors by issuing check payments. 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. This document will make auditors aware of the reconciled information at a later date. You need to determine the underlying reasons responsible for any mismatch between balance as per cash book and passbook before you record such changes in your books of accounts. When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference.

Fraudulent activity

A bank statement shows you those transactions and enables you to capture them in your records to reflect all the transactions affecting your business. The main reason a business should reconcile its bank statements is because you need to ensure your cash balance on the balance sheet is accurate. Regular bank reconciliations also help prevent fraudulent or unauthorized transactions from going unnoticed.

Compare your bank statements

If you’re not careful, your business checking account could be subject to overdraft fees. Once you have made the adjustments in the bank reconciliation statement, you’ll need to verify that the totals of both the adjusted balance as per the bank and the adjusted balance as per the cash book match. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits). Bank Example 1 showed that the bank credits the depositor’s checking account to increase the depositor’s checking account balance (since this is part of the bank’s liability Customers’ Deposits). When the bank debits a depositor’s checking account, the depositor’s checking account balance and the bank’s liability to the customer/depositor are decreased.

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. A bank reconciliation statement can help you identify differences between your company’s bank and book balances.

1. The bank reconciliation also provides a way to detect potential errors in the bank’s records.
2. A bank reconciliation statement is prepared by a depositor (account holder) to overcome differences in the balances of the cash book and bank statement.
3. There could be transactions unaccounted for in your personal financial records because of a bank adjustment.
4. In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period.
5. The purpose of this comparing and matching process is to ensure that discrepancies are identified and corrected.

Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet. In this section we will prepare a June 30 bank reconciliation for Lee Corp using the five steps discussed above. The bottom line of both sides of the bank reconciliation must be the same amount. In other words, Adjusted balance per BANK must equal Adjusted balance per BOOKS.

One of the primary reasons this happens is due to the time delay in recording the transactions of either payments or receipts. Deposits in transit, or outstanding deposits, are not showcased in the bank statement on the reconciliation date. This is due to the time delay that occurs between the depositing of cash or a check and the crediting of it into your account. Recall that the adjustments to the balance per BOOKS will require accounting entries for the items to be posted to the company’s general ledger accounts. Since the adjustments to the balance per the BOOKS have not been recorded as of the date of the bank reconciliation, the company must record them in its general ledger accounts.

However, there may be a situation where the bank credits your business account only when the checks are actually extraordinary repairs realised. The purpose of preparing a bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. The debit balance as per the cash book refers to the deposits held in the bank, and is the credit balance as per the passbook. These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement. These charges won’t be recorded by your business until your bank provides you with the bank statement at the end of every month. For each of the adjustments shown on the Balance per BOOKS side of the bank reconciliation, a journal entry is required.

A bank reconciliation reconciles the bank statement with the company’s bank account records. A bank reconciliation consists of a business’s deposits, withdrawals, expenses, and other activities directly impacting your bank account during a particular period. The purpose of this comparing and matching process is to ensure that discrepancies are identified and corrected. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than expected, which may result in bounced checks or overdraft fees. The frequency of bank reconciliation can vary based on your company’s specific needs. Some businesses balance their bank accounts monthly, after receiving their monthly bank statements.