The main reason a business should reconcile its bank statements is because you need to ensure your cash balance on the balance sheet is accurate. Regular bank reconciliations also help prevent fraudulent or unauthorized transactions from going unnoticed. The reconciliation of bank statements is a critical step in maintaining accurate financial records for any business. It helps to ensure that the company’s accounting records are up-to-date and accurate, which is essential for making informed business decisions. Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct.
However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. If you commonly make deposits into your account, you’ll want to compare your bank account deposit totals to those listed in your general ledger. Remember, banks make mistakes, too, with transposition errors common.
Therefore, before closing the accounting chapter in the banking book, reconciliation checks whether the closing page hits green light i.e. ending is correct and safe. As a part of this process, you might require to prepare some journal entries to correct errors. These errors are those which interrupt during bank statement and general ledger comparison. Since the adjusted balance for both the bank book and bank statement is $400, it means there are no extra items that need to be reconciled. It must ensure that the bank book balance is taken for the last date of the previous month or the month for which the bank statement is considered. These differences are adjusted against the bank statement balance but are not recorded in the bank statement.
At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook. However, there may be a situation where the bank credits your business account only when the cheques are actually realised.
Adjusting the General Ledger Balance
For large organizations and small businesses alike, a bank reconciliation should be prepared periodically because it enables you to report the most up-to-date figures. Knowing this information enables you to discover potentially nefarious activities, the bank administrator’s incompetence, or weaknesses in your reporting system in a timely manner. Additionally, many businesses are required by law to reconcile their bank accounts on a regular basis as part of their financial reporting obligations. Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile.
- Deciding basis the book balance will put you in an uncomfortable situation.
- For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period.
- To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly.
- Bank Reconciliation Statement is a statement which records differences between the bank statement and general ledger.
Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis. There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them. Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control.
You’ll need to account for these fees in your G/L in order to complete the reconciliation process. Your bank reconciliation form can be as simple or as detailed as you like. For example, your bank statement shows that your ending balance is $11,450, while your G/L balance according to your trial balance is $10,850. In simple words, to eradicate two different versions of the same document. However, if differences still exist, it either means that the type of those differences was not correctly identified or there are errors in either of the two balances. For errors in the bank statement, the bank is contacted and details are given about the transaction.
ADJUST THE CASH ACCOUNT
Before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits. Once the journal entries are recorded, the general ledger is prepared. You first need to determine the underlying reasons responsible for the mismatch between balance as per cash book and passbook. Once you have determined the reasons, you need to record such changes in your books of accounts.
Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month, weekly and even at the end of each day by businesses that have a large number of transactions. Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. Match the deposits in the business records with those in the bank statement. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side.
When can we request a Reconciliation?
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. If there’s a discrepancy between your accounts and the bank’s records that you can’t explain any other way, it may be time to speak to someone at the bank. If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the issue. TallyPrime also shows you complete detail of any unaccounted transactions, like bank charges or bank interests etc. and help you easily account those transactions from the same screen.
The statement displays the reasons for the differences between the two. A company can prepare a bank reconciliation statement at any time during the financial period. Read our blog to learn more about why you should prepare a bank reconciliation statement. A cash reconciliation solution is a tool that helps businesses match their financial records with bank statements, ensuring accuracy and preventing errors.
Make Necessary Adjustments in the Balance as per cash book
(f) The cash book does not contain a record of bank charges, $70, raised on 31 May. While this will cause a discrepancy in balances at the end of the month, the difference will automatically correct itself once the bank collects the checks. They also explain any delay in the collection of cheques, and they identify valid transactions recorded by one party but not the other. Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct.
What is the Bank Reconciliation Statement (BRS)?
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. Bank reconciliation statements are effective tools ways to improve your liquidity ratios for detecting fraud, theft, and loss. For example, if a check is altered, the payment made for that check will be larger than you anticipate. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money.
Effect of Time Intervals on Bank Reconciliation Statements
Bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank. Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies. Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes. Reconcile all transactions and ensure that the closing balances match on the balance sheet and the bank statements. Ensure that the income and expenses on the balance sheet match the bank statements to identify any unaccounted expenses or deposits.
Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account. This often happens when the checks are written in the last few days of the month. But there is no harm in double-checking the bank statements with ledgers. Once the balances are compared, if no differences exist, the bank reconciliation statement is not prepared. The balances will almost always be different and, therefore, the next step is followed.