They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding. Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. Such information is not available to your business immediately, so you record no entry in the business’ cash book for the above items.
Ensure that the income and expenses on the balance sheet match the bank statements to identify any unaccounted expenses or deposits. You only need to reconcile bank statements if you use the accrual method economic profit or loss definition of accounting. This is to confirm that all uncleared bank transactions you recorded actually went through.
Bank Reconciliation Statement
It shows what transactions have cleared on your statement with the corresponding transaction listed in your journal. 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. Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account. The bank will debit your business account only when they’ve paid these issued checks, meaning there is a time delay between the issuing of checks and their presentation to the bank. These time delays are responsible for the differences that arise in your cash book balance and your passbook balance. Nowadays, all deposits and withdrawals undertaken by a customer are recorded by both the bank and the customer.
In order to prepare a bank reconciliation statement, you’ll need to obtain both the current and the previous month’s bank statements as well as the cash book. NSF checks are an item to be reconciled when preparing the bank reconciliation statement, because when you deposit a check, often it has already been cleared by the bank. But this is not the case as the bank does not clear an NFS check, and as a result, the cash on hand balance gets reduced. Reconcile all transactions and ensure that the closing balances match on the balance sheet and the bank statements.
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This way, the number of items that can cause the difference between the passbook and the cash book balance is reduced. And as a result, it gets easier to ascertain the correct balance in the balance sheet. These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement. These charges won’t be recorded by your business until your bank provides you with the bank statement at the end of every month. These outstanding deposits must be deducted from the balance, as per the cash book, in the bank reconciliation statement.
First, check your two cash balances
This statement is used by auditors to perform the company’s year-end auditing. Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. So it makes sense to record these items in the cash book first in order to determine the adjusted balance of the cash book. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. As a result, the bank statement balance will be lower than the cash book balance, so the difference will need to be adjusted in your cash book before preparing the bank reconciliation statement. If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business.
- The debit balance as per the cash book refers to the deposits held in the bank, and is the credit balance as per the passbook.
- One of the most common causes of discrepancies in bank reconciliations is delays in deposit and transaction processing.
- Nowadays, all deposits and withdrawals undertaken by a customer are recorded by both the bank and the customer.
Tips for Streamlining Your Bank Reconciliation Process
For the most part, how often you reconcile bank statements will depend on your volume of transactions. If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise! Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid). If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below).
If, on the other hand, you use cash basis accounting, then you record every transaction at the same time the bank does; there should be no discrepancy between your balance sheet and your bank statement. Any credit cards, PayPal accounts, or other accounts with business transactions should be reconciled. The goal of bank account reconciliation is to ensure your records align with the bank’s records.
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. Outstanding checks are those that have been written and recorded in the financial records 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.
