What Is a Bank Reconciliation Statement, and How Is It Done?

At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account. It is important to note that it takes a few days for the bank to clear the cheques. This is especially common in cases where the cheque is deposited at a bank branch other than the one at which your account is maintained. One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts.

• 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.
• Since deposits in transit have already been recorded in the company’s books as cash receipts, they must be added to the bank statement balance.
• Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
• In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one.
• When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference.

To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting. The next step is to adjust the cash balance in the business account. These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process. Your bank reconciliation form can be as simple or as detailed as you like. For example, your bank statement shows that your ending balance is $11,450, while your G/L balance according to your trial balance is $10,850.

We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you). If, on the other hand, you use cash basis accounting, then you record every transaction at the same time the bank does; there should be no discrepancy https://accounting-services.net/ between your balance sheet and your bank statement. If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below). If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you. The bank balance on September 30 is $27,395, but according to My Company records, the ending cash balance is $24,457.

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. If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise! https://accountingcoaching.online/ Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid). Reconciling your bank statement used to involve using a checkbook ledger or a pen and paper, but modern technology—apps and accounting software—has provided easier and faster ways to get the job done.

Why is automated reconciliation better than manual?

We’ll take bookkeeping completely off your hands (and deal with the bank reconciliations too). You can do a bank reconciliation when you receive your statement at the end of the month or https://simple-accounting.org/ using your online banking data. NSF means “non-sufficient funds,” and in this case, refers to a check that came from a bank account that didn’t have enough cash to cover the amount.

While it may be tempting to assume you have more money in the bank than you think, it’s a safe bet that the difference is checks and other payments made that have not yet hit the bank. Checks that are outstanding for a long period of time are known as stale checks. In the U.S., outstanding checks are considered to be unclaimed property and the amounts must be turned over to the company’s respective state after several years. Therefore, rather than allowing checks to become stale and then remitting the amounts to a state government, companies should contact the payees of any checks that have been outstanding for several months.

Consider reconciling your bank account monthly, whether you set aside a specific day each month or do it as your statements arrive. Consider performing this monthly task shortly after your bank statement arrives so you can manage any errors or improper transactions as quickly as possible. Keeping accurate records of your bank transactions can help you determine your financial health and avoid costly fees. Using this simple process each month will help you uncover any differences between your records and what shows up on your bank statement. The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet.

However, in the bank statement, such a balance is showcased as a debit balance and is known as the debit balance as per the passbook. Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited. The balance recorded in your books (again, the cash account) and the balance in your bank account will rarely ever be exactly the same, even if you keep meticulous books. When they draw money from your account to pay for a business expense, they could take more than they record on the books.

What Is a Bank Reconciliation Statement?

After entering the formula, drag it down to apply it to all the outstanding checks. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. To do this, a reconciliation statement known as the bank reconciliation statement is prepared. You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee. Since the Adjusted balance per BANK of $1,719 is equal to Adjusted balance per BOOKS of $1,719, the bank statement of June 30 has been reconciled.

How Often Should You Reconcile Your Bank Account?

With VLOOKUP, you can easily search for specific check numbers within the bank statement and determine if they have been cleared. The cash balance per book is usually lower than the bank’s balance, in this case. The automatic withdrawal requires a simple journal entry that debits utilities expense and credits cash for $253.

How to do a bank reconciliation

Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance. Next, we will prepare a bank reconciliation for a hypothetical company by using transactions that are commonly encountered. When it comes to the choice of software for reconciliation automation, you have options. Checks that remain outstanding for long periods of time cannot be cashed as they become void.

Bank Reconciliation Statement Template

If an outstanding check of the previous month clears the bank, it means the bank paid the check and the check will appear as a deduction on the statement. For each of the adjustments shown on the Balance per BOOKS side of the bank reconciliation, a journal
entry is required. Each journal entry will affect at least two accounts, one of which is the company’s
general ledger Cash account. 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. Automation transforms this admin-heavy task by automatically matching transactions with precision and speed. Routh has unique insights into the challenges that lead accounting professionals to seek out software (read more about our advisors here).

Understanding the Bank Reconciliation Statement

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 a company writes a check, the company’s general ledger Cash account is credited (and another account is debited) 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 (is paid through) the company’s bank account one week later. For example, if a company writes a check that has not cleared yet, the company would be aware of the transaction before the bank is.