Bank Reconciliation Definition & Example of Bank Reconciliation

what is bank reconciliation

The information on the bank statement is the bank’s record of all transactions impacting the entity’s bank account during the past month. A bank reconciliation statement is important in managing your busines finances. This document can help ensure that your bank account has a sufficient balance to cover company expenses.

Bankrate follows a stricteditorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. The bank reconciliation is an important part of a company’s internal controls over its assets. To be effective, it should be done by someone other than an authorized check signer and/or record keeper. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February).

Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier cash basis accounting definition to ascertain the correct amount of balance at the bank in the balance sheet. 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.

Errors Made by Your Business or your Bank

Once solved, be sure to adjust your records to reflect deposits as needed. Next, check to see if all of the deposits listed in your records are present on your bank statement. For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. When you record the reconciliation, you only record the change to the balance in your books.

The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book. In accounting, a company’s cash includes the money in its checking account(s). To safeguard this critical and tempting asset, a company should establish internal controls over its cash. Bank reconciliation statements can help identify accounting errors, discrepancies and fraud.

This situation should only arise if someone at the company requested the bank to alter the closing date for the company’s bank account. Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both sides mentioned at the bottom match. Therefore, when your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. Such errors are committed while recording the transactions in the cash book.

This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same. The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank.

  1. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud.
  2. The offers that appear on this site are from companies that compensate us.
  3. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.

Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement. Also, deduct any penalties https://www.online-accounting.net/period-costs-product-vs-period-costs-accounting/ or fees the bank assessed that your ledger doesn’t list. Our goal is to give you the best advice to help you make smart personal finance decisions.

Bank Reconciliation: Purpose, Example, and Process

Note that Community Bank credits its liability account Customers’ Deposits (which includes the individual depositor’s checking account balance). As a result, Community Bank’s balance sheet will report an additional $10,000 in assets and an additional $10,000 in liabilities. When a company writes a check, the company’s general ledger Cash account is credited (and another account is debited) using the date of the check.

what is bank reconciliation

Compare your personal transaction records to your most recent bank statement. 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. For instance, if you haven’t reconciled your bank statements in six months, you’ll need to go back and check six months’ worth of line items.

What is a Bank Reconciliation?

For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement doesn’t show such a deposit, there may have been a mistake or fraud. As with deposits, take time to compare your personal records to the bank statement to ensure that every withdrawal, big or small, is accounted for on both records. If you’re missing transactions in your personal records, add them and deduct the amount from your balance.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

The purpose behind preparing the bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits). Regularly creating a bank reconciliation statement allows you to find errors by comparing your company ledger with your bank statement. There could be transactions unaccounted for in your personal financial records because of a bank adjustment. This may occur if you were subject to any fees, like a monthly maintenance fee or overdraft fee. For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period.

Recent Posts