What Is Bank Reconciliation?

GAAP requires that if the direct method is used, the company must still reconcile cash flows to the income statement and balance sheet. Using a double-entry accounting system, as shown below, she credits cash for $2,000 and debits her assets, which is the equipment, by the same amount. For her first job, she credits $500 in revenue and debits the same amount for accounts receivable. Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement. Reconciliation also confirms that accounts in a general ledger are consistent and complete.

The resultant figure in the cash book should be equal to the bank statement balance. The more frequently you reconcile your bank statements, the easier it is each time. 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. In a small business, that responsibility usually falls to the owner (or a bookkeeper, if you hire one. If you don’t have a bookkeeper, check out Bench).

• It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts.
• If you notice that an account that should have a debit balance has a credit balance, or vice versa, evaluate each relevant transaction to find the error and make corrective entries.
• You can also perform bank reconciliation by hand, meaning you’d manually compare your bank statement to your general ledger transaction by transaction.
• Let’s assume that you’ve paid a cheque to a vendor for a service they’ve provided.
• This is why most companies opt to perform their bank reconciliation at the end of each month.

To balance these two documents, businesses of all sizes need to perform regular reviews, called bank reconciliations. Bank account reconciliation is comparing your bank statement to your business’s internal list of transactions over a given time period. During bank reconciliation, you’ll compare the two accounts to ensure they reflect the same transaction details and cash flow amounts. If the accounts don’t match, you’ll need to find the source of the financial discrepancy, repair it, and compare the accounts again to see if they balance.

Understanding the Bank Reconciliation Statement

During the bank reconciliation process, you’ll compare your bank statements to your business’s financial records. You’ll note any differences between your business’s cash records and your bank’s records, then adjust your internal records to ensure their accuracy. At the end of the process, both your bank account and general ledger (GL) should match, and any differences between the two records should be resolved (or reconciled). Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct.

Bank reconciliation also helps you identify fraud or theft and intervene early. If someone has withdrawn funds without your knowledge or consent, bank reconciliation will clue you in. If you’re searching for accounting software that’s user-friendly, full of smart features, and scales with your business, Quickbooks is a great option. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book.

You don’t necessarily have to create a bank reconciliation statement every time you reconcile your accounts—if you perform bank reconciliation every day, you probably shouldn’t. Otherwise, though, statements are a good way to stay on top of your business’s finances. The goal of creating a bank reconciliation statement is to ensure that the cash records of your business are correct, and the bank balance is equal to the balance in your financial records.

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Bank reconciliation statements can help identify accounting errors, discrepancies and fraud. For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement does not show such a deposit, there may have been a mistake or fraud. To start with, businesses can adopt bank reconciliation templates to match bank statements with the cash book.

Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences. Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can make the necessary corrections in your books of accounts to ensure accuracy. A bank reconciliation statement is important in managing your business’ finances.

Our number one bank reconciliation tip

Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank.

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

The easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank. Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column. Now, we know performing a reconciliation every single day can be time-consuming and costly to implement, hence, it’s accountant definition recommended that all businesses do a bank reconciliation once a month. The automation of bank reconciliation is only one of the many features that come with the Deskera Books platform. The software allows you to keep track of your sales and business expenses, fill out invoices, pay bills, generate financial statements, and so much more, in just a few clicks.

It involves looking at your company’s books and your company’s actual bank statement and cross-checking the two records to make sure that they match. Partners or financiers may require bank reconciliation statements as part of the funding process, and they are helpful in the case of an audit. After performing a bank reconciliation, it is advised that the document is kept on file like any other financial statement that a business generates and held onto as part of its records. Note that this balance is different from the company’s general ledger’s Cash account balance of $7,000.

As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. As a result of such 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. When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. This means that the bank balance of the company is greater than the balance reflected in its cash book.

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This situation should only arise if someone at the company requested the bank to alter the closing date for the company’s bank account. Therefore, when your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts. Such errors are committed while recording the transactions in the cash book.

By completing a bank reconciliation every day, you can spot and correct problems immediately. Cloud accounting software like Quickbooks makes preparing a reconciliation statement easy. Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. In addition to ensuring correct cash records, the bank reconciliation process also helps in keeping track of the occurrence of any form of fraud. Such insights would help you as a business to control cash receipts and payments in a better way.