We’ll take bookkeeping completely off your hands (and deal with the bank reconciliations too). Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality.
- All of this can be done by using online accounting software like QuickBooks.
- Generally, these transactions are either recorded on a spreadsheet or within your accounting software.
- Without bank reconciliation, the bank book balance and bank statement balance of the company will never match.
Plus, if you use payment platforms such as PayPal, Vemno or Zelle for your business, you’ll need to reconcile those too. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. For instance, if you haven’t reconciled your bank statements in six months, you’ll need to go back and check six months’ worth of line items. Whether this is a smart decision depends on the volume of transactions and your level of patience. For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash.
How often to reconcile bank statements
Usually, the process happens at the beginning of the month, as banks typically send monthly statements at month’s end. This is any transaction where money is being deducted, is a negative transaction or is leaving your bank account. All amounts should sync up—if not, subtract any missing transactions and probe to get to the root of the discrepancy. Claire is a senior editor at Newsweek focused on credit cards, loans and banking. Her top priority is providing unbiased, in-depth personal finance content to ensure readers are well-equipped with knowledge when making financial decisions. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data.
- A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud.
- So, if you’re reconciling for January, look at the last number on January 31st.
- Accounting errors, such as missed or double payments, are not uncommon.
These charges may come in the form of bank charges, interest charges, or taxes levied by the government. However, the bank charges these amounts to its customers’ accounts directly. Since the company does not receive the bank statement until the end of the month, it cannot predict these charges or record them.
6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
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 comparing the balance as per the cash book with the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts. All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book.
If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. There are times when the bank may charge a fee for maintaining your account. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account. In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business. Therefore, the bank needs to add back the cheque’s amount to the bank balance. Such errors are committed while recording the transactions in the cash book.
It must ensure that the bank book balance is taken for the last date of the previous month or the month for which the bank statement is considered. 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. These differences are adjusted against the bank statement balance but are not recorded in the bank statement.
As previously mentioned, errors can occur on both sides, the bank book or the bank statement. For the business, the transaction will already have been recorded in the bank book because the cheque was issued. For the bank, because there was no cheque presented, the transaction never occurred. 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.
The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account.
Compare the balance from the bank statement with the bank book
Unrecorded differences are amounts that are present in the bank statement but not present in the bank book are known as unrecorded differences. There are two main things that companies look for in a bank reconciliation. These are categories of discrepancies that cause a difference in the balances between the balances in the bank book and bank statement. Bank accounts for businesses can involve thousands of transactions per month. Interest is automatically deposited into a bank account after a certain period of time.
Bank Reconciliation (Explanation)
Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits. Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records. For example, say ABC Holding Co. recorded an ending balance of $500,000 on its records.
What is the purpose of a bank reconciliation statement?
The company may need to repeat the process until the balance becomes zero, or it identifies any errors. Timing differences are items that cause a difference between the balances in the bank statement professional bookkeeping service and bank book due to the timing of transactions. These differences generally comprise two types of items, outstanding checks, and deposits in transits, also known as outstanding lodgments.
This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. A bank reconciliation statement reconciles the bank statement with the company’s accounts. As mentioned above, timing differences do not require any adjustments in the bank book balance. Therefore, these items need to be part of the bank reconciliation statement only.
This drives greater efficiency in their business and saves company resources. It also allows finance teams to spend more time on value-add tasks, such as evaluating data to inform company strategy and key decisions. 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.