A bank reconciliation is important because it gives you a true view of your business’s financial state. You can catch discrepancies such as bank service fees or interest income that you may have missed before. However, if discrepancies are discovered when reconciling the bank account, it’s important to investigate and find out where the money went. It could be that a cheque never cleared or was cashed illegally, for example.

  • An accounting software and dedicated company that really takes into consideration each customer and client, it’s designed to make your bank reconciliations so much easier.
  • When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book.
  • This guide is meant to catch up for those just starting with bookkeeping.
  • If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you).

Look for any differences in amounts, dates, or checks that have been written but may not appear on the bank statement. Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors. First and foremost, bank reconciliation matters because it helps you get a real view of your business’s finances. When you review your books, it’s important that what you’re reading reflects reality.

How to do a bank reconciliation

It’s a good idea to use a dedicated bank account just for your business. That way you know all the transactions on your bank statement are business related, and should appear in your business accounts. Regularly scheduled bank reconciliations help you accurately spot and fix inconsistencies, ensuring cash balance accuracy. A Bank Statement Reconciliation is the process where you confirm your financial records align with those of your bank.

  • This is to confirm that all uncleared bank transactions you recorded actually went through.
  • A bank reconciliation is the process of matching the balances in an entity’s accounting records for a cash account to the corresponding information on a bank statement.
  • So, this means there is a time lag between the issue of cheques and its presentation to the bank.
  • So the company’s accountant prepares an entry increasing the cash currently shown in the financial records.
  • When preparing a bank reconciliation statement, a journal entry is prepared to account for fees deducted.
  • At the very end, once the balances are equal and there aren’t any issues, you must prepare respective journal entries to reflect the changes to the balance sheet.

It can also happen that a client pays their dues, but you don’t receive a notification, or simply forget to journalize the transaction altogether. It’s also important to note that you only need to do a bank reconciliation if you’re using accrual accounting. If you’re using cash accounting, it means you record every transaction simultaneously with the bank, so there can’t be any miscalculations and thus no need for reconciliation. Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits.

Understanding the Bank Reconciliation Statement

The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match. To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business. However, the depositor/customer/company credits its Cash account to decrease its checking account balance. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits). Note that Community Bank credits its liability account Customers’ Deposits (which includes the individual depositor’s checking account balance).

Why Is Bank Reconciliation Important?

This saves your company from paying overdraft fees, keeps transactions error-free, and helps catch improper spending and issues such as embezzlement before they get out of control. Account reconciliation the best 10 excel bookkeeping templates for free wps office academy is particularly useful for explaining any differences between two financial records or account balances. Some differences may be acceptable because of the timing of payments and deposits.

Otherwise, you could end up spending cash you don’t own, or holding back from potential investments and financial growth. Frequent bank reconciliations confirm your accounts match up, which allows you to properly track your cash flow and as a result, make sensible financial decisions. Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, every week, or even at the end of each day in case of businesses having a huge number of transactions.

If left to build up for too long, errors and discrepancies can build up and may start to impact your business and cash flow. Consider how high your transaction volume is and find a reasonable medium that strikes a balance between being practical and taking over your time. Many choose to schedule reconciliation to take place prior to credit control meetings so the data is as up-to-date as can be. This means aspects such as your bank statement balance and bank reconciliation statement will be relevant and any bank service fees or interest income from transactions will be accounted for.

Step 2: Comparing Bank Statements with Internal Records

The bank sends the account statement to its customers every month or at regular intervals. Make a note of any discrepancies between your bank statement balance, cash balance, and transaction history. Following the review and comparison of your internal bank records, with those on the bank statement, you will adjust your accounting records to reflect any discrepancies or unidentified transactions.

Compare the Balances

If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. For the most part, how often you reconcile bank statements will depend on your volume of transactions. Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix.

You may miss errors or fraudulent activities on your statements, resulting in incorrect balances or even financial losses. Failing to reconcile can make it challenging to track expenses accurately or identify cash flow issues. It involves comparing a company’s bank statements with its records of bank transactions.

Bank reconciliation is like solving a puzzle – you gather the pieces, compare them, investigate any differences, make adjustments, and update your records to achieve balance. It’s essential for individuals and businesses alike to stay on top of their financial health. Bank service charges are fees the bank charges for various services they provide, such as monthly maintenance or overdraft fees. Bank service fees can affect your account balance and must be accounted for during reconciliation.