How to Do a Bank Reconciliation: Step-By-Step Process

Therefore, the bank needs to add back the cheque’s amount to the bank balance. This means that the bank balance of the company is greater than the balance reflected in its cash book. While expensing out the missing amount is an option, it is not the recommended approach. That is because bank reconciliation is a crucial part of the internal control process of a business. Even minute discrepancies can be an indicator of other underlying problems.

• Ideally, you should reconcile your bank account each time you receive a statement from your bank.
• Reconciling your accounts is not optional due to the necessity for all companies to file annual statements, summarising a year’s worth of transactions accurately.
• However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors.
• This vital task ensures the cash account’s book balance aligns with the bank’s reported balance.

Compare the ending balance of your accounting records to your bank statement to see if both cash balances match. We strongly recommend performing a bank reconciliation at least on a monthly basis to ensure the accuracy of your company’s cash records. A monthly reconciliation helps to catch and identify any unusual transactions that might be caused by fraud or accounting errors, especially if your business uses more than one bank account. The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate.

Bank reconciliations are a must

Without bank reconciliation, the bank book balance and bank statement balance of the company will never match. Similarly, without bank reconciliation, the company cannot identify any expenses that the bank may have charged to the bank account. Therefore, the expenses of the company will be misstated and go against the prudence concept of accounting. You’ll need a few items to perform a bank reconciliation, including your bank statement, internal accounting records, and a record of any pending cash transactions (either inflows or outflows). In accounting, a company’s cash includes the money in its checking account(s).

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. Business owners regularly compare their records with bank transactions to ensure there are no errors. It is a best practice to check that their balance sheet numbers are accurate and match the bank statement. If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet.

Comparing Accounting: Bank vs. Company

This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. As mentioned above, timing differences do not require any adjustments in the bank book balance. Therefore, these items need to be part of the bank reconciliation statement only.

For timing differences, the company must cancel out the effect of outstanding checks and deposits in transit. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement. This process helps you monitor all of the cash inflows and outflows in your bank account.

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The most common deposit in transit is the cash receipts deposited on the last business day of the month. Normally, deposits in transit occur only near the end of the period covered by the bank statement. For example, a deposit made in a bank’s night depository on May 31 would be recorded by the company on May 31 and by the bank on June 1. Thus, the deposit does not appear on a bank statement for the month ended May 31.

• Companies which are part of a group tend to perform intercompany reconciliations at month-end.
• To prevent collusion among employees, the person who reconciles the bank account should not be involved in the cash disbursement cycle.
• Bank Example 1 showed that the bank credits the depositor’s checking account to increase the depositor’s checking account balance (since this is part of the bank’s liability Customers’ Deposits).
• Similarly, if there are deposits appearing in the bank statement but are not in the cash book, add the entries to the cash book balance.

If you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information. But, you will record such transactions only in your business’ cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook. Typically, which of the following is not a step in preparing a bank reconciliation? the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. Therefore, it makes sense to first record these items in the cash book to determine the adjusted balance of the cash book. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month.