How to Do a Bank Reconciliation: Step-By-Step 2023

If a bank reconciliation is off by a very small amount, it is usually due to rounding errors. Similarly, it can also be because the preparer of the bank reconciliation has missed some expense from the bank statement. Generally, it is a good idea to prepare the bank reconciliation again and pay attention to even small amounts and not rounding off figures obtained from the bank statement. It is also a good idea to mark any expenses that have already been included in the bank reconciliation statement to avoid any errors. Sometimes banks make errors by depositing or taking money out of your account in error. You will need to contact the bank to correct these errors but will not record any entries in your records because the bank error is unrelated to your records.

Furthermore, each of the items is matched with your books of accounts. Bank Reconciliation is the process of comparing your business’ books of accounts with your bank statements. It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts. Bank reconciliation is the process of matching the bank balances reflected in the cash book of a business with the balances reflected in the bank statement of the business in a given period. Such a process determines the differences between the balances as per the cash book and bank passbook. After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month.

Acquire Bank Statements

Whereas, accounting record book records the same entries by the hands of the accountant. Match the deposits in the business records with those in the bank statement. 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.

Bank accounts for businesses can involve thousands of transactions per month. This bank statement is an example of the transactions that occurred during the month. Bank reconciliations are an important part of a business’ internal control system. Bank reconciliations must be performed to find the differences between the bank book balance of a business and its bank statement balance.

Where Do Non-Sufficient Funds (NSF) Checks Go on a Bank Reconciliation?

If that kind of error happens, we have to do some research and contact the bank to make sure it gets corrected, but we do not have to change our books. First of all, the unrecorded differences are identified and recorded. First of all, the balance from the bank statement is compared with the bank book. The balance in the bank statement is $500 while the balance on the bank book is $2,350. Once both these documents are available, the following steps must be followed to prepare a bank reconciliation statement.

• By doing so, any residual reconciling items at month-end are so minor that they can be completed in a few minutes.
• (Remember that our demand deposit with the bank is a liability to the bank, just as it is an asset to us, so the bank increases our account with a credit entry).
• Cloud accounting software like Quickbooks makes preparing a reconciliation statement easy.
• Solutions such as HighRadius’s cash management software can auto-reconcile transactions based on standard and user-defined tagging rules, saving time and reducing the risk of errors.

The company prepares the bank book while its bank prepares the bank statements. At the end of the period, there are going to be differences between the balances in both the documents. To reconcile the differences in both balances, the company must prepare a bank reconciliation statement. To avoid those situations, bank reconciliation statements are prepared. This statements simply matches the bank transactions as per company books with bank statement so that you always have accurate bank balance reflecting in the books of accounts. Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences.

Bank Reconciliation: Purpose, Example, and Process

For example, the bank credited the business account for a transaction that did not relate to the account. Errors are generally rectified promptly if they are caused due to an error in the bank book. Apart from these types of differences, errors may also occur on either the business’ side of the records or the bank’s side of the records. Solutions such as HighRadius’s cash management software can auto-reconcile transactions based on standard and user-defined tagging rules, saving time and reducing the risk of errors.

Timing differences are differences due to timing of different transactions. These are differences that are already recorded in the bank book of the business but do not appear on the bank statement of the bank account. If there is an undocumented reconciling item, review the bank reconciliation process steps just noted. If there is still an undocumented variance, go back to the bank reconciliations for the preceding periods and see if the variance arose in a prior period. Check if the bank deposits and withdrawals match the records on the balance sheet.

The entry might be saved as an added amount and causes an error in the company’s ledger. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. For a different perspective when preparing a bank reconciliation and chance to practice simple bank reconciliations, click Banking Practice. The check was written for $5,843, but recorded in our books at $5,483. Something to remember about a transposition error is that it is always divisible by 9.

• This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct.
• Deposits in transit, outstanding checks, and bank service charges usually account for the difference between the company’s Cash account balance and the bank balance.
• For this reason, in your bank account, deposits are credits (remember, liabilities increase with a credit) and checks and other reductions are debits (liabilities decrease with a debit).
• The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger.
• These are categories of discrepancies that cause a difference in the balances between the balances in the bank book and bank statement.
• The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions.
• Similarly, it can also be because the preparer of the bank reconciliation has missed some expense from the bank statement.

Auto bank reconciliation in TallyPrime provides a simple and no-frills method of reconciling your company bank books with the bank statement. As discussed above, the differences between the bank book and bank statement of a business can be classified into two categories, unrecorded differences and timing differences. Given the amount of time required to complete the bank reconciliation process, some companies attempt to minimize its impact on the period-end closing process by running a daily reconciliation. By doing so, any residual reconciling items at month-end are so minor that they can be completed in a few minutes.