How to Prepare Bank Reconciliation? A Step-by-Step Guide

This process involves matching the bank statement with the company’s general ledger account balance, identifying discrepancies, and making necessary adjustments. Bank reconciliation is the process that helps you ensure your company’s accounting records match your bank statements. It’s a core account reconciliation and a https://www.bookstime.com/bookkeeping-services/lancaster way to double-check that the money you think you have matches what’s in your company’s bank account. This process is crucial for performing accurate financial reporting and managing cash flow effectively.

Compare the Deposits

The company found that there are $300 bank charges, $250 interest charges, and a $1,000 deposit by a customer, who didn’t notify ABC Co. of the deposit. Since these are all unrecorded differences, ABC Co. must record them in its accounting system. The bank statement, on the other hand, is a document that indicates the bank balance of a company from the bank’s side of transactions.

Month-end Bank Reconciliation

Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account. Differences are caused by items reflected on company records but not yet recorded by the bank. Examples include deposits in transit (a receipt entered on company records but not processed by the bank) and outstanding checks (checks written which have not cleared the bank).

How to Prepare Bank Reconciliation? A Step-by-Step Guide

It’s essential to ensure that the starting balance is accurate before beginning the reconciliation process. 10% of all occupational fraud cases in small businesses are due to bank account reconciliation errors. The first step is to obtain a detailed statement from the bank, which includes information about checks cleared and rejected by the bank, transaction charges, and bank fees. For example, real estate investment company ABC purchases approximately five buildings per fiscal year based on previous activity levels.

• When your business issues a check to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash book.
• Checks sent or received at the end of the day, or toward the end of the month, may be subject to delay which will prevent them from being included on the bank statement.
• Bank reconciliation is the process that helps you ensure your company’s accounting records match your bank statements.
• The company reflected the payment it received from debtors in its cashbook, but the payment hasn’t yet reflected in the bank account.
• Great care is necessary to record each debit card transaction into the accounting records, and appropriate approval and documentation can be problematic.
• Also, if you’ve made a check payment at the end of the month, it might not clear until the following reporting period.

The company prepares the bank book while its bank prepares the bank statements. At the end of the period, there are going to be differences between the balances in both the documents. To reconcile the differences in both balances, the company must prepare a bank reconciliation statement. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month.

• Once you have identified all the differences between the two statements, identify the source of the discrepancy.
• Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records.
• Doing a bank reconciliation is fairly simple, but you need to be diligent in your efforts and avoid skipping steps to ensure the right checks and balances.
• For example, if a business writes a check, it will post it to its cash book that day and then send it on to its supplier.
• The company prepares the bank book while its bank prepares the bank statements.

Improves Fraud and Error Detection

The purpose of this comparing and matching process is to ensure that discrepancies are identified and corrected. Typically, bookkeepers or accountants will prepare the bank reconciliation statement either by hand or with the help of integrated accounting software. However, some businesses employ third-party providers to reconcile their bank records for improved accuracy and turnaround time. This is especially common with larger bank reconciliation companies that have more transactions to account for each month. A bank reconciliation statement is a document that compares the bank book balance of a company with its bank statement balance.

Tips for Streamlining Your Bank Reconciliation Process

Once the balances are equal, businesses need to prepare journal entries to adjust the balance per books. After adjusting the retained earnings balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation. Next, check to see if all of the deposits listed in your records are present on your bank statement. Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly.

However, with the bank’s electronic records readily accessible, the bank reconciliation should be done more frequently. Following the completion of the reconciliation journals are required to post the adjustments for the reconciling items. The journals vary depending on the type of reconciling items, and typical examples are shown in our bank-reconciliation journal entries post. The accountant of company ABC reviews the balance sheet and finds that the bookkeeper entered an extra zero at the end of its accounts payable by accident. The accountant adjusts the accounts payable to $4.8 million, which is the approximate amount of the estimated accounts payable. Because the individual is fastidious about keeping receipts, they call the credit card to dispute the amounts.