Bank Reconciliation: Definition, Example, and Process
Book transactions are transactions that have been recorded on your books but haven’t cleared the bank. As a small business, you may find yourself paying vendors and creditors by issuing check payments. Note that this process is exclusively for reconciliations performed by hand. If you use accounting software, then your reconciliation is done largely for you. However, as a business owner, it’s important to understand the reconciliation process. Once the balances are equal, businesses need to prepare journal entries to adjust the balance per books.
Bank Reconciliation: Purpose, Example, and Process
In cases where you discover discrepancies that cannot be explained by your financial statements, it’s best to contact your bank. It’s possible that a banking error has occurred or that you have been charged for something you were unaware of. If the charges are not from your bank, the bank can also help you identify the source so that you can prevent any fraud or theft risk.
How often should you reconcile your bank account ?
- A monthly reconciliation helps to catch and identify any unusual transactions that might be caused by fraud or accounting errors, especially if your business uses more than one bank account.
- A company can ensure that all payments have been processed accurately by comparing their internal financial records against their bank account balance.
- The entries in the statement stop being the cause of discrepancies after a few days.
- Banks often record other decreases or increases to accounts and notify the depositor by mailed notices.
Business owners regularly compare their records with bank transactions to ensure there are no errors. It is a best practice that current liabilities definition and example enables them to check that their balance sheet numbers are accurate and match the bank statement. If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match. The cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement.
Common errors and how to avoid them
In order to prepare a bank reconciliation statement, you’ll need to obtain both the current and the previous month’s bank statements as well as the cash book. NSF checks are an item to be reconciled when preparing the bank reconciliation statement, because when you deposit a check, often it has already been cleared by the bank. But this is not the case as the bank does not clear an NFS check, and as a result, the cash on rules for an inventory audit hand balance gets reduced. 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.
There are times when the bank may charge a fee for maintaining your account, which will typically be deducted automatically from your account. Therefore, when preparing a bank reconciliation statement you must account for any fees deducted from your account. To credits and deductions for individuals reconcile your bank statement with your cash book, you’ll need to ensure that the cash book is complete and make sure that the current month’s bank statement has also been obtained.
There will be very few bank-only transactions to be aware of, and they’re often grouped together at the bottom of your bank statement. We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task. Our intuitive software automates the busywork with powerful tools and features designed to help you simplify your financial management and make informed business decisions.
If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors.