prepare a bank reconciliation

The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees.

If you’re reconciling your personal account, you should have a list of deposits in your checkbook- along with your deposit slips. The bank statement balance would need to be credited to reflect the true amount of cash. Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there. However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. Those payments are recorded in your G/L, but they have yet to hit the bank.

In case there are any differences, due to outstanding checks or any other errors, specify such differences in your company’s bank reconciliation statement. In the past, it was common for a company to prepare the bank reconciliation after receiving the monthly bank statement and before issuing the company’s balance sheets. However, with today’s online banking a company can prepare a bank reconciliation throughout the month . This allows the company to verify its checking account balance more frequently and to make any necessary corrections much sooner. The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate.

For example, let us assume that your account reflects $9,100 while your bank statement reflects $9,000. When you check your transactions, you realize that the excess $100 is because the bank has charged a total transaction fee which you haven’t added to your account statement. For example, if the bank statement issued for the month of August 2021 states that the final balance is $9,000, then your closing balance in your books should also reflect $9,000.

prepare a bank reconciliation

Mostly, errors occur in the bank book of the business rather than the bank statements. These errors are then investigated properly to ensure they were not committed intentionally. Since the bank book is an internal document and the bank statement is an external document, there are bound to be differences between the two. Therefore, it is a good practice for businesses to also have a separate bank book for every account so it is easier for them to find any differences between the balances and reconcile them. Transactions in the bank statement are presented the opposite of transactions in a bank book. For example, a receipt will be a Debit in the bank book while it will be presented as a Credit in the bank statement. When you finish your review, you should create a list of each deposit that has not posted to the bank account.

Prepare a statement to reconcile the bank statement balance to the corrected balance on the bank column of the cash book. Prepare a statement reconciling the balance on the bank statement with the cash book balance from . If bank reconciliation statement is started with a debit balance then add any un-presented cheques and deduct any un-credited cheques. The opposite rules apply if it is started with a credit balance. When a company writes a check, the company’s general ledger Cash account is credited using the date of the check. Therefore, a check dated June 29 will be recorded in the company’s accounts using the date of June 29, even if the check clears the company’s bank account one week later.

Step #4: Make Sure That The Balance As Per Bank Matches With The Balance As Per Cash Book

The next step in the bank reconciliation process is to adjust unrecorded differences. As mentioned above, unrecorded differences require accounting treatment.

prepare a bank reconciliation

Automation ensures the accuracy of data so you can prevent sharing any financial statements with errors. Not only must you consider the immense amount of data involved, but you must also be aware of timing differences that can affect the process. People across departments or within the same department may be involved in having to complete their own tasks before the sequential step can occur. You’re probably aware that bank reconciliations aren’t the only reconciliations worth doing. Balance sheet reconciliations are another very important type of reconciliation to perform on a consistent basis. With software, the system can pull the records from various sources and match line items in no time.

Adjusting The General Ledger Balance

Bank reconciliations are performed by comparing the balances from the bank book and bank statement and identifying differences and the types of those differences. Unrecorded differences will be adjusted and recorded in the bank book and timing differences will be adjusted against the bank statement prepare a bank reconciliation balance. 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. Check for any errors made by the bank’s processing department.

  • Any accounts that are active should be reconciled at month end, even if there are only a few transactions.
  • Then we click the Finalize button in the bottom left to complete the process.
  • Sending the statement directly limits the number of employees who would have an opportunity to tamper with the statement.
  • In case there is a difference between the amount recorded by the bank and your own books of accounts, you need to adjust either your own records or intimate the bank about such a difference.
  • Compute the adjusted bank balance, also called corrected or reconciled balance.
  • Preparation of regular bank reconciliation statements has several benefits.

A few such instances include deposits in transit and outstanding checks. Such banking errors should be modified so that the right amount gets reflected. In order to prepare a bank reconciliation statement, you need to obtain the current as well as the previous month’s bank statements and the cash book. Now, match all the checks that have been listed on your bank statement like the ones that have been cleared by the bank to those checks that are recorded in your own books. Then, start marking those checks in your own records that match with the checks listed on the bank statement. In case there is a difference between the amount recorded by the bank and your own books of accounts, you need to adjust either your own records or intimate the bank about such a difference.

Click To See An Example Of The Bank Reconciliation Report

This will bring down the balance at the level of the bank statement while preparing the bank reconciliation statement. The previous entries are standard to ensure that the bank records are matching to the financial records. These entries are necessary to update Feeter‛s general ledger cash account to reflect the adjustments made by the bank.

Review to see if those checks posted to the current month’s bank statement. If the check cleared your bank, indicate that in your records. You can document the cleared check using accounting software, or using a manual report. Increase the bank balance for any deposits that have not posted .

Once deposited, checks may take several days to clear the banking system. Determine the outstanding checks by comparing the check numbers that have cleared the bank with the check numbers issued by the company. Use check marks in the company’s record of checks issued to identify those checks returned by the bank. Checks issued that have not yet been returned by the bank are the outstanding checks. If the bank does not return checks but only lists the cleared checks on the bank statement, determine the outstanding checks by comparing this list with the company’s record of checks issued. Checks outstanding as of the beginning of the month appear on the prior month’s bank reconciliation. Most of these have cleared during the current month; list those that have not cleared as still outstanding on the current month’s reconciliation.

prepare a bank reconciliation

Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet. Bank reconciliations can help a company to verify that its bank account ending balance per the bank matches the balance on hand per the company’s general ledger. US$Bank book balance3,200Bank chargesInterest chargesDeposit by customer1,000Adjusted bank book balance3,650The next step is to identify timing differences. The company found there are $3,000 deposits in transit and $2,000 outstanding checks.

Adjust The Cash Account

Finally, when you are able to figure out the differences between your cash balance and bank balance, you need to make adjustments to your company’s cash account. Now, when you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the check issued on November 30 is unlikely to be cashed by the bank. Next, prepare a list of checks that have ledger account not been cleared by the bank. Hence, it needs to be deducted from the bank’s closing cash balance for your account. Checks presented but not cleared is a reconciling item and hence needs to be deducted from the bank’s closing cash balance for your account. Then, adjust the errors of an incorrect amount of the check that you have recorded in your own books of accounts.

The bank statement of the Fast Company shows a balance of $10,000 on 31 January 2015 whereas the company’s ledger shows a balance of $8,525. The following unearned revenue reasons have been identified for this discrepancy. Mark as cleared all the checks, electronic withdrawals, etc. that appear on our bank statement.

For the bank, because there was no cheque presented, the transaction never occurred. These differences are adjusted against the bank statement balance but are not recorded in the bank statement. These are differences that will appear in the bank statement after some time, most probably in the next bank statement. Timing differences, unlike unrecorded differences, are not recorded in either the bank book or the bank statement. The bank book and the bank statement of a business are both made up of the information about the bank balance of the business.

Apart from fraud, bank reconciliation can also help a company detect errors. Performing regular bank reconciliation can help the company identify any issues within its internal processes related to bank transactions that may result in errors. It can, in turn, help the company improve its bank processes and make them more efficient and effective. Therefore, bank reconciliation can help the company identify any weaknesses within the banking transaction controls. There are no unrecorded Receipts (Cr.) but if they did exist, they would be debited to the bank book. The other side of the entries will be taken to their relevant accounts, for instance, bank charges account. Therefore, once the business gets the bank statement and identifies these differences, these are recorded in the bank book of the business.

DateDescriptionPayments (Dr.)9-MayDirect Debit1,50016-MayBank charges15023-MayInterest charges300Therefore, these must be recorded. The bank book of ABC Co. will be credited with the above amounts because they are all payments from the bank account. Once the balances are compared, if no differences exist, the bank reconciliation statement is not prepared. The balances will almost always be different and, therefore, the next step is followed. Once the bank statement is received, the business must check the balance on the bank statement against the balance on the bank book. For the business, the transaction will already have been recorded in the bank book because the cheque was issued.

Compare Balances

An outstanding check draws on the funds in an individual’s or business’ bank account but has not yet been cashed or deposited by the payee. A deposit in transit is money that has been received by a company and sent to the bank, but it has yet to be processed and posted to the bank account.

When you process a Bank Reconciliation in QuickBooks, you help avoid bounced checks, overdrafts, and ensures A/P transactions have cleared. Interest is automatically deposited into a bank account after a certain period of time. Thus, the accountant may need to prepare an entry that increases the cash currently shown in the financial records. After all, adjustments are made to the books, the balance should equal the ending balance of the bank account.

What Does A Bank Reconciliation Statement

If there are still some differences, these may be due to errors in either the two balances or the bank reconciliation process. The company may need to repeat the process until the balance becomes zero, or it identifies any errors. The first step in preparing bank reconciliation is to obtain both the bank statement and bank book balances of a company and compare them. If these balances are different, then the company must prepare a bank reconciliation statement. If the balances match, which is rare but still possible, a bank reconciliation statement is not needed.

Similar to checks, such deposits have been recorded by the company, but are not yet reflected on a bank statement. After a check is issued, it may take some time before its holder presents it to the bank. Therefore, a bank statement would not show such checks until they are presented to the bank, but the company has already recorded such checks as cash deductions in their cash account. Other differences occur since sometimes on set of records is uninformed of cash transactions that the other has recorded. I.e. cash receipts that the business might have recorded but not yet banked or bank charges that the bank has paid from the bank account of the business but not yet informed the business.

Therefore, when your balance as per cash book does not match with your balance as per passbook, there are certain adjustments that you have to make in order to balance the two accounts. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned.

Here are two examples to reinforce the bank’s use of debit and credit with regards to its customers’ checking accounts. You can earn our Bank Reconciliation Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium bank reconciliation materials.

Author: Mark J. Kohler