How To Do Bank Reconciliation for Your Business

There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. The bank will debit your business account only when the bank pays these issued cheques. After adjusting all the above items what you get is the adjusted balance of the cash book. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.

Since both balances are different, bank reconciliation should be prepared. Since the company has already obtained the balance from both the documents, the first step for bank reconciliation is complete. The first step in preparing bank reconciliation is to obtain both the bank statement and bank book balances of a company and compare them. If these balances are different, then the company must prepare a bank reconciliation statement. If the balances match, which is rare but still possible, a bank reconciliation statement is not needed.

Bank Reconciliation Problems

Therefore, these items need to be part of the bank reconciliation statement only. For timing differences, the company must cancel out the effect of outstanding checks and deposits in transit. The company checks this statement against its records to determine if it must make any corrections or adjustments in either the company’s balance or the bank’s balance. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger. Bank reconciliation is a part of the internal control process of a company.

When a company maintains more than one checking account, it must reconcile each account separately with the balance on the bank statement for that account. The depositor should also check carefully to see that the bank did not combine the transactions of the two accounts. Automation can solve the problem of time-consuming manual reconciliation and reduce errors. Cross-checking the bank statement and balance sheet can be done without human intervention using software tools. 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.

3: Preparing a Bank Reconciliation

You come to know about such deductions only when you receive the statement from the bank. Bank reconciliations may be tedious, but the financial hygiene will pay off. They may not be fun, but when you do them on a regular basis you protect yourself from all kinds of pitfalls, like overdrawing money and becoming a victim of fraud.

Incorrectly recording transactions in the accounting system can result in errors in the balance sheet and bank statement, making it challenging to reconcile. 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.

How To Do a Bank Reconciliation

When they draw money from your account to pay for a business expense, they could take more than they record on the books. Any credit cards, PayPal accounts, or other accounts with business transactions should be which of the following is not a step in preparing a bank reconciliation? reconciled. Automating bank reconciliation can reduce the cost of processing and audit costs. It can also save money by keeping a closer eye on the company’s finances and identifying any discrepancies or errors.

Usually, there are two categories of differences that may cause differences between the two balances. As mentioned above, these include timing differences and unrecorded differences. The reason why companies must categorize the differences is that the treatment for both is different.

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. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash 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. 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. To reduce confusion during a reconciliation there are several steps you can take. For starters, you should obviously count and record cash on a daily basis. It may also be necessary to pull a current sales report throughout the day if your business is making a lot of transactions with cash.

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In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one. For example, if a business pays a cheque to a supplier but the supplier does not cash the cheque in the bank in that month. First, you’ll want to save and organize all the records and documents. This means making a plan to keep all documents in a safe place when they come in.

• He is the sole author of all the materials on AccountingCoach.com.
• Sometimes banks make errors by depositing or taking money out of your account in error.
• In other words, the adjusted balance as per the bank must match with the adjusted balance as per the cash book.
• Most people will try to balance their checkbook on a regular basis.
• If the business has a high volume of transactions, reconciliations should be done more frequently.
• Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet.
• If the history is not saved in certain types of software voided transactions may be completely deleted.