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

The reconciliation of bank statements is a critical step in maintaining accurate financial records for any business, ensuring that the company’s accounting records are up-to-date and accurate. By reconciling bank statements regularly, business owners can identify any missing or duplicate transactions, bank errors, or fraudulent activity early on, before they pose significant challenges. We’ll explore the definition of bank reconciliation, why it’s important, and a step-by-step process for performing bank reconciliations. We’ll also look at common sources of discrepancies between financial statements and bank statements to help you identify fraud risks and errors.

Greg adds the $11,500 of deposits in transit to his bank statement balance, bringing him to $99,500. He also subtracts the $500 in bank fees from his financial statement balance, bringing him to $99,500 and balancing the two accounts. Once you determine the differences between the balance as how to write off a fixed asset per the cash book and the balance as per the passbook, you’ll need work out the balance as per the bank portion of the bank reconciliation statement. These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement. These charges won’t be recorded by your business until your bank provides you with the bank statement at the end of every month. Sometimes your current bank account balance is not a true representation of cash available to you, especially if you have transactions that have not settled yet.

Step 4: Make Sure the Balance As Per the Bank Matches the Balance As Per the Cash Book

1. By avoiding these common errors, you can ensure the accuracy of your organization’s financial records, make informed business decisions, and reduce the risk of financial issues.
2. The goal of bank account reconciliation is to ensure your records align with the bank’s records.
3. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank.
4. You will know about this only when you receive the bank statement at the end of the month.

For example, if a business identifies any suspicious activity or unidentifiable transactions, it’s essential to prepare a bank reconciliation immediately. Similarly, if customer payment checks on the balance sheet do not match bank records, a cross-check is necessary. A bank reconciliation is an essential process for ensuring that your company’s financial statements match the available cash in your business 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. Keeping accurate financial statements is the easiest way to simplify your bank reconciliation process.

Where Do Non-Sufficient Funds (NSF) Checks Go on a Bank Reconciliation?

Bank statements also show expenses that may not have been included in financial statements, such as bank fees for account services. Regularly reconciling your bank statements helps businesses detect potential issues with their financial recording system, making it easier to rectify those problems quickly. This can range from one-off errors such as calculation mistakes or double payments to major concerns like theft and fraud. A bank reconciliation compares a company’s cash accounting statements against the cash it has in the bank. A bank reconciliation is used to detect any errors, catch discrepancies between the two, and provide an accurate picture of the company’s cash position that accounts for funds in transit.

Starting with an incorrect opening balance:

Reconciling bank statements with cash book balances helps your business know the underlying causes of these balance differences. Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can then make the necessary corrections in your books to ensure accuracy. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match. The frequency of reconciling bank statements depends on the size and complexity of the business and its transaction volume. For larger companies with a high volume of transactions, it’s advisable to reconcile bank statements daily to ensure that any discrepancies or errors are promptly identified and corrected..

As a result, the company’s books, or cash account, reflect a $7000 debit balance as of March 31. Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile. Miscellaneous debit and credit entries in the bank statements must be recorded on the balance sheet. If there are any differences, adjust the balance sheet to reflect all transactions. If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source.

These deposited checks or discounted bills of exchange drawn by your business may get dishonored on the date of maturity. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. The debit balance as per the cash book refers to the deposits held in the bank, and is the credit balance as per the passbook. 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.