Bank Reconciliation Definition & Example of Bank Reconciliation

The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank’s records. Before you reconcile your bank account, you’ll need to ensure that you’ve recorded all transactions from your business until the date of your bank statement. If you have access to online banking, you can download the bank statements when conducting a bank reconciliation at regular intervals rather than manually entering the information. Accurate cash flow is essential for keeping a business running smoothly, so it’s important to be aware of all incoming and outgoing cash.

If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you. When you product archives “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy. Then, you make a record of those discrepancies, so you or your accountant can be certain there’s no money that has gone “missing” from your business. At times, your customers may directly deposit funds into your business’ bank account, but your business will not notified about this the bank statement is received.

First, make sure that all of the deposits listed on your bank statement are recorded in your personal record. If not, add the missing deposits to your records and your total account balance. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly. A bank may charge an account maintenance fee, typically withdrawn and processed automatically from the bank account. When preparing a bank reconciliation statement, a journal entry is prepared to account for fees deducted.

Using this simple process each month will help you uncover any differences between your records and what shows up on your bank statement. Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records.

Comparing Accounting: Bank vs. Company

These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement. These charges won’t be recorded by your business until your bank provides you with the bank statement at the end of every month. These outstanding deposits must be deducted from the balance, as per the cash book, in the bank reconciliation statement. In cases where you discover discrepancies that cannot be explained by your financial statements, it’s best to contact your bank. It’s possible that a banking error has occurred or that you have been charged for something you were unaware of. If the charges are not from your bank, the bank can also help you identify the source so that you can prevent any fraud or theft risk.

Who are the parties involved in a bank reconciliation statement?

You only need to reconcile bank statements if you use the accrual method of accounting. This is to confirm that all uncleared bank transactions you recorded actually went through. The balance recorded in the passbook or the bank statement must match the balance reflected in the customer’s cash book. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank.

The easiest way to find these adjustments when completing a bank reconciliation is to look at bookkeeping vs accounting vs auditing the bank fees. You’ll also want to look at any miscellaneous deposits that haven’t been accounted for. Once you locate these items, you’ll need to adjust your G/L balance to reflect them. Notice that the bank reconciliation form above still does not balance, even after including the outstanding checks. This means the bank has made an adjustment to your account that has not been recorded in your G/L.

Fact Checked

Greg adds the $11,500 of deposits in transit to his bank statement balance, bringing him to $99,500. He also subtracts the $500 in bank fees from his financial statement balance, bringing him to $99,500 and balancing the two accounts. The more frequently you do a bank reconciliation, the easier it is to catch any errors. Many companies may choose to do additional bank reconciliations in situations that involve large sums of money or that show unusual financial activity.

1. If any discrepancies cannot be identified and reconciled, it may signal an error or risk of fraud which your company can investigate further.
2. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
3. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct.
4. The more frequently you do a bank reconciliation, the easier it is to catch any errors.
5. After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month.

At times, the balance as per the cash book and passbook may differ due to an error committed by either the bank or an error in the cash book of your company. It is important to note that it takes a few days for the bank to clear the checks. This is especially common in cases where the check is deposited at a different bank branch than the one at which your account is maintained, which can lead to the difference between the balances. To do this, businesses need to take into account bank charges, NSF checks, and errors in accounting.