Bank Reconciliation: Purpose, Example, Process

In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than expected, which may result in bounced checks or overdraft fees. To reconcile your bank accounts, you’ll first need a copy of your most recent bank statement and access to your business’s accounting records. Specifically, you’ll want access to the general ledger and cash book, which records your cash and bank transactions. Compare each bank transaction to the corresponding transaction as recorded in your general ledger, ensuring the documents match. The frequency of bank reconciliation can vary based on your company’s specific needs.

If a company is unaware of the exact amount of these fees, they may not be included in the company’s financial records and will only be seen when they receive their bank statement. Human error in the data entry process can sometimes lead to incorrect amounts or miscalculations on a business’s financial statements. While it cannot entirely erase the potential for data processing errors, using accounting software can reduce the likelihood of errors to help generate more accurate financial statements. Begin with a side-by-side comparison of your bank account statement and your company’s accounting records.

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. Go through both statements and highlight any transactions that appear on only one side. Note that transactions may take a few days to clear, so the transaction date in your financial records may not precisely match the date on your bank statement. It’s recommended for a company to perform a bank reconciliation at least once a month.

Identify Discrepancies

Using cloud accounting software, like Quickbooks, makes preparing a reconciliation statement easy. Because your bank account gets integrated with your online accounting software, all your bank transactions will get updated automatically and each item will be matched with your books of accounts. When all these adjustments have been made to the books of accounts, the balance as per the cash book must match that of the passbook. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. The purpose of reconciling bank statements with your business’ cash book is to ensure that the balance as per the passbook matches the balance as per the cash book.

What is the purpose of a bank reconciliation statement?

You should perform monthly bank reconciliations so you can better manage your cash flow and understand your true cash position. Read on to learn about bank reconciliations, use cases, and common errors to look for. 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.

Add bank-only transactions to your book balance

Check that your financial transaction records include all payments and deposits for the transaction period, as well as the final balance. The statement itemizes the cash and other deposits made into the checking account of the business, as well as any expenses paid by the business. This includes everything from wages and salaries paid to employees to business purchases like equipment and materials.

Or maybe you scheduled a rent payment and listed it in your chart of accounts as usual, but the notification that your payment bounced went to your spam folder. As a result, you didn’t notice the payment actually bounced until your end-of-the-month bank reconciliation. If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If not, you’re most likely looking at the role of decision modeling in business decision management an error in your books (or a bank error, which is less likely but possible). If you suspect an error in your books, see some common bank reconciliation errors below.

Compare Statements

1. Or maybe you scheduled a rent payment and listed it in your chart of accounts as usual, but the notification that your payment bounced went to your spam folder.
2. Resolving the issue could mean paying a bill, depositing a check, or entering a forgotten transaction into your general ledger.
3. An online template can help guide you, but a simple spreadsheet is just as effective.
4. When your business issues a check to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash book.
5. Next, check to see if all of the deposits listed in your records are present on your bank statement.

Regular bank reconciliation saves you from having to review a full year of financial records—instead, you can quickly consult your reconciliation statements to review any required information. Bank reconciliation isn’t just important for maintaining accurate business finances—it also ensures your customer and business relationships remain strong. Regular bank reconciliation double-checks that all payments have been accurately processed. This includes payments by customers to your company and payments from your company to employees, contractors, and other goods and services providers.

You’ll compare the two lists and check a box next to each QuickBooks transaction that also shows up on your bank statement. If you don’t see a balance of zero, QuickBooks helps you troubleshoot the errors and reconcile your accounts. Then, go to the company’s ending cash balance and deduct from it any bank service fees, NSF checks and penalties, and add to it any interest earned. At the end of this process, the adjusted bank balance should equal the company’s ending adjusted cash balance. Some bank services, including expedited payments, bank drafts, and in some cases paper bank statements, may come with additional bank fees.

Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document. This document will make auditors aware of the reconciled information at a fiduciary accounting software quickbooks later date. Such errors are committed while recording the transactions in the cash book, so the balance as per the cash book will differ from the passbook.