Bank Reconciliation Definition & Example of Bank Reconciliation

Bank reconciliation statements outline the outstanding transactions you found and the adjustments you made to your books during the bank rec process. It’s an expanded version of the bank rec journal entry, with details about each unaccounted-for transaction instead of combining the totals of each kind of transaction. If you use accounting software, on the other hand, you’ll likely have the ability to reconcile your bank statements directly in the platform. Now, take the bank statement balance of $1,500 and deduct it by $50 to account for the check payments you made to your vendors.

1. Some businesses balance their bank accounts monthly, after receiving their monthly bank statements.
2. Regardless of how you do it, reconciling your bank account can be a priceless tool in your personal finance arsenal.
3. If you’re missing transactions in your personal records, add them and deduct the amount from your balance.
4. Contact your bank to investigate further and find where the issue lies.

An accurate record of your business performance is also needed for tax returns and financial audits. Do bank reconciliations regularly and often, and you’ll always have this information ready to go. Making sure a company’s and its bank’s how to prepare a bank reconciliation listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process also enables the company to record any interest payments the account has earned or fees the bank has charged.

How Often Should You Reconcile Bank Statements?

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. 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. It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely. However, connecting your accounting software to your bank or financial institute does not take the place of doing a month-end bank reconciliation.

Know That Banks Might Also Make Errors

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. However, there can be situations where your business has overdrafts at the bank.

Not Sufficient Funds Cheques

The company can now take steps to rectify the mistakes and balance its statements. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. The more frequently you reconcile your bank statements, the easier it is each time. You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the cheques issued but not yet presented for payment.

At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc. Therefore, you record no entry in the business’ cash book for the above items. Although fintech and automation are widely celebrated, there are still some accounting practices that need a keen set of human eyes. Companies can designate several individuals to handle certain aspects of bank reconciliation, and they can complete reconciliations in a variety of ways. The basic sequence, of preparing a bank reconciliation, consists of the following eight steps. It may not be the most exciting task to do in your business, though, and you might even be wishing there was an easier way to do this.

Next, check to see if all of the deposits listed in your records are present on your bank statement. When it comes to optimizing accounts payable management, reconciling your bank account is critical to staying on track. If you don’t ensure the business and bank are on the same page, tiny mistakes can snowball into huge problems. It’s the duty of any business, large or small, to keep accurate financial records to ensure things balance.

Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books. To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting. Bank errors are mistakes made by the bank while creating the bank statement. Common errors include entering an incorrect amount or omitting an amount from the bank statement. Compare the cash account’s general ledger to the bank statement to spot the errors.