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

In addition, there may be cases where the bank has not cleared the checks, however, the checks have been deposited by your business. Banks take time in clearing checks, so the bank needs to add back the check’s amount to the bank balance. You’ll need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or any checks issued that have not yet been presented for payment. In addition to this, the reconciliation process also helps keep track the occurrence of fraud, which can help you control your business’ cash receipts and payments. While this will cause a discrepancy in balances at the end of the month, the difference will automatically correct itself once the bank collects the checks. The firm’s account may contain a debit entry for a deposit that was not received by the bank prior to the statement date.

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How to Prepare a Bank Reconciliation

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. However, sometimes there are differences between the two balances and so you’ll need to identify the underlying reasons for such differences. After adjusting all the above items what you’ll get is the adjusted balance of the cash book. However, there can be situations where your business has overdrafts at the bank, which is when a bank account goes into the negative as a result of excess withdrawals.

Adjusting the General Ledger Balance

This process ensures accurate tracking of financial transactions and balances. A bank reconciliation is an essential process for ensuring that your company’s financial statements match the available cash in your business what is a note receivable bank account. Performing regular bank reconciliations helps you stay on top of cash flow, keep organized records for tax season, and minimize the risk of fraud and theft.

What Should You Do if You Cannot Reconcile Your Account?

Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. The correction of the error will increase or decrease the cash account in the books. After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation.

1. Regardless of how you do it, reconciling your bank account can be a priceless tool in your personal finance arsenal.
2. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared.
3. In this instance, your bank has recorded the receipts in your business account at the bank, while you haven’t recorded this transaction in your cash book.
4. If so, these entries will not appear in the bank reconciliation statement prepared at the end of the current month.
5. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud.
6. While it cannot entirely erase the potential for data processing errors, using accounting software can reduce the likelihood of errors to help generate more accurate financial statements.

Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis. There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them. Learn how to build, read, and use financial statements for your business so you can make more informed decisions. All of this can be done by using online accounting software like QuickBooks, but if you are not using accounting software, you can use Excel to record these items. As a result of these direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book.

Maintaining accurate financial records makes it easier to organize your taxes when it comes time to file. Regular bank reconciliation saves you from having to review a full year of financial records—instead, you can quickly consult your reconciliation statements to review any required information. By comparing the two statements, Greg sees that there are $11,500 in checks for four orders of lawnmowers purchased near the end of the month. These checks are in transit, so they haven’t yet been deposited into the company’s bank account.