Introduction to Preparing a Bank Reconciliation Financial Accounting

These are differences that are recorded in the bank statement of a business but not in the bank book of the business. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed). When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash. They might reconcile on a daily basis to make sure everything matches and all cash receipts hit the bank account.

That is because they receive bank statements at the end of each month. Some small-sized companies prepare bank reconciliations once every 2-3 months. While preparing bank reconciliations regularly is better than preparing it after a couple of months, if the number of bank transactions is low, companies may choose to perform it later. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger. A bank reconciliation is a critical tool for managing your cash balance. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement.

What Are Common Problems With Bank Reconciliations?

Once you locate these items, you’ll need to adjust your G/L balance to reflect them. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates. The goal of bank account reconciliation is to ensure your records align with the bank’s records. This is accomplished by scanning the two sets of records and looking for discrepancies. If you find any errors or omissions, determine what happened to cause the differences and work to fix them in your records.

The end result should be a reconciliation of the two balances, with any remaining differences explained and resolved. The reconciliation of bank statements is a critical step in maintaining accurate financial records for any business. It helps to ensure that the company’s accounting records are up-to-date and accurate, which is essential for making informed business decisions. Bank reconciliation statement is a report or statement prepared by the business to match the bank transactions recorded in the books of accounts with the bank statement. The bank reconciliation statement helps to check the correctness of the entries recorded in the books of accounts and thereby, ensures the accuracy of bank balances.

What is a Bank Reconciliation?

Accurate financial statements allow investors to make informed decisions. The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. You could get that from a statement, from online banking, or by having the bank send data straight to your accounting software. If you run a current account and a credit card account, you’ll need both statements.

• This means there is a difference of $1,850 between the two balances.
• However, there can be situations where your business has overdrafts at the bank.
• A bank may charge an account maintenance fee, typically withdrawn and processed automatically from the bank account.
• TallyPrime‘s auto bank reconciliation will minimize the time spent and the risk of errors during bank reconciliation.
• Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook.

After adjusting all the above items what you get is the adjusted balance of the cash book. Those payments are recorded in your G/L, but they have yet to hit the bank. You need to subtract both checks from your bank balance, as well as any other checks listed in your check register that haven’t https://www.bookstime.com/articles/cash-flow-statement cleared. If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the issue. To do this, a reconciliation statement known as the bank reconciliation statement is prepared.

Example 1: Preparation of Bank Reconciliation Statement Without Adjusting the cash book Balance

Bank reconciliations are made by a business to reconcile any differences between the bank statement of a business and its bank books. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. 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! 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).

Bank reconciliation happens when you compare your record of sales and expenses against the record your bank has. All of this can be done by using online accounting software like QuickBooks. In case you are not using accounting software, you can use Excel to record such items. From the following how to prepare a bank reconciliation particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2021. You will know about such information only when you receive the bank statement at the end of the month. Therefore, you record no entry in the business’ cash book for the above items.