What is Bank Reconciliation? How to Do it in 4 Steps

Regular system and data checks, as well as updated credentials, prevent most synchronization or reporting problems before they interrupt your workflow. Automation features, such as bank feeds and transaction matching, deliver up-to-date results with minimal effort. Record the finalized reconciliation in your system for audit and future reference. For example, deposits in the books but not yet credited by the bank should be listed as deposits in transit.

You should consider our materials to be an introduction to selected accounting and bookkeeping topics (with complexities likely omitted). (Instead of removing the $145 and then adding $154, Lee Corp is adding the difference of $9 to the accounts.) Therefore, Lee Corp must increase its Cash account balance by $9 and increase its Sales by $9. (The deposited check was not paid by the bank on which it was drawn and was returned.) As a result, Lee Corp must reduce its general ledger Cash account by $110. Since this reduces Lee Corp’s checking account balance, Lee Corp will need to reduce the balance in its general ledger asset account Cash. Since this reduced the balance in Lee Corp’s checking account, Lee Corp must credit its Cash account and debit an expense such as Bank Fees Expense.

Compare every amount on the bank statement (or in the bank’s online information) with every amount in the company’s general ledger Cash account and note any differences. If any of these transfers were not recorded in the company’s general ledger as of the date of the bank reconciliation, the company will list them on the bank reconciliation as adjustments to the balance per books. Bank overdraft occurs when checks written by a company are presented to its bank for payment and the company’s checking account balance is not sufficient to pay the checks. Companies should safeguard their checking accounts through internal controls, which includes timely bank reconciliations prepared by an independent person. When the business receives its bank statement, it can use the final amounts of interest and investment income to make adjustments and reconcile its financial statements. As such, exact amounts may not be accurately included on financial statements before the reconciliation process.

Checking Account Terminology

• If any discrepancies are found, they can then be investigated and corrected to maintain financial stability.
• Your cash flow projections are only as good as your underlying data.
• Therefore, Lee Corp must increase its Cash account balance by $9 and increase its Sales by $9.
• This is your true cash balance for financial accounting purposes.
• This Excel template makes it easy for you to reconcile your bank statement with your own financial records on a monthly basis.

Consider using accounts payable automation software to streamline the process. This is particularly important when managing your small business bank account. Monthly reconciliation is standard for most small businesses. Without regular bank reconciliation, that money could be lost entirely. If you run a small contracting business, reconciling your bank account each month how to prepare a bank reconciliation could help you catch a $2,500 duplicate payment to a supplier.

Therefore, Lee Corp must increase its Cash account balance and decrease the balance in its asset account Notes Receivable. We assume that Lee Corp had not yet recorded the collection of the note in its general ledger accounts. This adjustment must also be recorded in the company’s general ledger with a credit to Cash and a debit to Bank Fees Expense. A bank debit memo is recorded in the bank’s general ledger with a debit to the bank’s liability account Customers’ Deposits (and a credit to another account).

The Future of Bank Reconciliations

It’s ideal for individuals or businesses who want to keep a detailed record of their bank transactions and ensure that their records match their actual bank statements. They will reconcile bank statements, cash statements, and other important financial data to maintain holistic and accurate financial records. Alternatively, bank reconciliation compares a company’s recorded transactions to its bank statement to confirm that deposits, withdrawals, and other transactions align. When reconciling bank statements, businesses often find differences between their internal financial records and the bank’s records. As you review each transaction, some may only appear in bank statements before they are recorded in business cash accounts. By performing reconciliation banking tasks, businesses ensure they account for all cash transactions, detect potential errors, and prevent fraud.

What is Bank Statement Reconciliation?

You might also discover missing transactions that exist in your records but haven’t appeared on your statement, or vice versa. Every experienced bookkeeper understands discrepancies to be a normal part of the reconciliation process, not necessarily a sign of error. The art of bank reconciliation becomes a more manageable science with the right approach and tools. If you haven’t set up online banking access, contact your bank for guidance on accessing your digital statements.

CashSimple® offers real-time cash reporting, streamlining manual tracking to ensure accurate reconciliations. Businesses should follow a similar process to align their financial records accurately. The table below demonstrates a reconciliation process where bank and book balances differ but are adjusted to match. This can be done through a brief notation at the end of the cash accounting ledger with any discrepancies listed and their resolution. Once this cash is purchased, it is deposited into the business bank account within 24 hours so there’s no need to wait for armored cash transport. Similarly, some payments like outstanding checks or deposits in transit are recorded in the company records but have yet to reach the bank.

This early detection reduces the risk of fraud and financial loss. However, companies with high transaction volumes may benefit from weekly or even daily reconciliations. Take control of your business finances with Alaan. As transaction volumes grow, relying on manual processes becomes increasingly risky and inefficient.

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Templates

FreshBooks accounting software helps you track income and expenses and generate reports and financial statements. 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. In cases where you discover discrepancies that cannot be explained by your financial statements, it’s best to contact your bank. One of the most common causes of discrepancies in bank reconciliations is delays in deposit and transaction processing.

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Voided checks are those that should not have cleared but somehow appear as debits in your bank statement. Update both the cash book and the bank statement to reflect these changes. This process is crucial for performing accurate financial reporting and managing cash flow effectively. Even accounts with low activity, such as company savings accounts or foreign currency accounts used for transactions in the GCC, must be reconciled.

• Unexplained differences may stem from delays in bank processing or overlooked entries.
• Understanding cash flow means having complete visibility into the money moving in and out of accounts.
• By performing reconciliation banking tasks, businesses ensure they account for all cash transactions, detect potential errors, and prevent fraud.
• Much like a skilled accountant, you’ll need to methodically work through each variance to bring your records into alignment.
• Accounting for these delays is key to reconciling the total amounts on the company’s financial statement and the bank statement.
• Let’s walk through a typical bank reconciliation statement that illustrates how to identify and resolve common discrepancies between your records and your bank statement.

Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. Common errors include entering an incorrect amount or omitting an amount from the bank statement. These may include deposits in transit, outstanding checks, bank fees, or miscalculations by the bank or the internal accounting team.

Discrepancies in bank reconciliations can arise from data processing errors or delays and unclear fees at the bank. Performing immediate bank reconciliations for large cash amounts or suspicious transactions further increases your ability to catch fraud and error. Conducting regular bank reconciliation helps you catch any fraud risks or financial errors before they become a larger problem.

Journal entries record items that affect your book balance, such as bank fees, NSF checks, or interest earned. Following the steps in this guide helps ensure your financial records remain accurate and audit-ready throughout the year. If you manage family employment or complex payroll with Form 940 and Form 941 requirements, consider using bank reconciliation services for professional verification. Below is a simple example showing how timing differences and banking adjustments affect your final cash balance. When working with 1099 contractors, accurate cash records become essential for year-end reporting. Mark items appearing in both records as cleared using proper journal entry accounting procedures.

The person or company named on the check is known as the payee. This transaction results in the bank’s assets decreasing by $1,000 and its liabilities decreasing by $1,000. Three days later, the landlord cashes the check at Community Bank.

We reference each entry as E, F, B, D, G, C, or K, as indicated on the right side of the bank reconciliation. For each of the adjustments shown on the Balance per BOOKS side of the bank reconciliation, a journal entry is required. (The letter in the “Item” column will be shown on the bank reconciliation next to the amount.) In this section we will prepare a June 30 bank reconciliation for Lee Corp using the five steps discussed above. Record in the company’s general ledger the adjustments to the balance per BOOKS. The bottom line of both sides of the bank reconciliation must be the same amount.