With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have. We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task. These checks are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment.
Step 4: Find G/L adjustments
An NSF (not sufficient funds) check is a check that has not been honored by the bank due to insufficient funds in the entity’s bank accounts. This means that the check amount has not been deposited in your bank account and hence needs to be deducted from your cash account records. Regularly reconciling your bank statements helps businesses detect potential issues with their financial recording system, making it easier to rectify those problems quickly. This can range from one-off errors such as calculation mistakes or double payments to major concerns like theft and fraud. Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits.
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 bookkeeping services san diego 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. Once you have identified all the differences between the two statements, identify the source of the discrepancy. Common sources include deposits in transit that have not yet been deposited in your bank account, as well as bank fees that have been withdrawn by your bank but may have been missed in your company records.
Effect of Time Intervals On Bank Reconciliation Statements
If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. The more frequently you reconcile your bank statements, the easier it is each time. Ideally, you should run a reconciliation each time you receive the statement from your bank.
Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. For instance, the bank charged your business $30 in service fees, but it also paid you $5 in interest. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days.
After adjusting all the above items, you’ll end up with the adjusted balance as per the cash book, which must match the balance as per the passbook. In addition to this, the reconciliation process also helps keep track the occurrence of fraud, which can help you control your business’ cash receipts and payments. These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process. The items therein should be compared to the new bank statement to check if these have since been cleared. Examples include deposited checks returned for non-sufficient funds (NSF) or notes collected on the depositor’s behalf.
- If not, you’re most likely looking at an error in your books (or a bank error, which is less likely but possible).
- If you’ve earned any interest on your bank account balance, it must be added to the cash account.
- Check that your financial transaction records include all payments and deposits for the transaction period, as well as the final balance.
- One reason for this is that your bank may have service charges or bank fees for things like too many withdrawals or overdrafts.
- In cases where you discover discrepancies that cannot be explained by your financial statements, it’s best to contact your bank.
Make Necessary Adjustments in the Balance as per the Cash Book
When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. One of the primary reasons this happens is due to the time delay in recording the transactions of either payments or receipts. The purpose of preparing a bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. 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. Bank errors are mistakes made by the bank while creating the bank statement.
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Keeping accurate financial statements is the easiest way to simplify your bank reconciliation process. FreshBooks accounting software helps business formation what are some of the advantages or disadvantages of a sole proprietorship you track income and expenses and generate reports and financial statements. Try FreshBooks for free to streamline your tax preparation and bank reconciliations today. Human error in the data entry process can sometimes lead to incorrect amounts or miscalculations on a business’s financial statements.
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. 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. Nowadays, all deposits and withdrawals undertaken by a customer are recorded by both the bank and the customer. The bank records all transactions in a bank statement, also known as passbook, while the customer records all their bank transactions in a cash book.
