Bank Reconciliation Definition & Example of Bank Reconciliation

Reconciling your bank statements simply means comparing your internal financial records against the records provided to you by your bank. This process is important because it ensures that you can identify any unusual transactions caused by fraud or accounting errors. As a business, the practice can also help you manage your cash flow and spot any inefficiencies.

After finding evidence for all differences between the bank statement and the cash book, the balances in both records should be equal. You should prepare a bank reconciliation statement that explains the difference between the company’s internal records and the bank account. Account reconciliation is necessary for asset, liability, and equity accounts since their balances are carried forward every year.

What Is Account Reconciliation and Why Is It Crucial?

It needs to match the balance of your real-life bank account for the day you decided to start tracking transactions in QuickBooks. Finally, look for the transactions that are in the general ledger, but not on the statement, and vice versa. Do you need to record the bank fees or credit card interest in the general ledger? Add and subtract these as appropriate until you can get both sides to match. Next, match the entries in the general ledger with transactions on the statement. Adding to the challenge, sometimes an entry in the general ledger may correspond to two or more entries in a bank statement, or vice versa.

After an investigation, the credit card is found to have been compromised by a criminal who was able to obtain the company’s information and charge the individual’s credit card. The individual is reimbursed for the incorrect charges, the card is canceled, and the fraudulent activity stopped. And for those of you still handling your accounting manually, making the move to accounting software will eliminate much of the work you’re doing using manual ledgers. This step may not be necessary for smaller businesses with limited activity.

What is Reconciliation in Accounting?

It involves calling up the account detail in the statements and reviewing the appropriateness of each transaction. The documentation method determines if the amount captured in the account matches the actual amount spent by the company. The bank reconciliation ensures your bank account ending balance matches the balance reflected in your general ledger. Learn which general ledger accounts should be reconciled regularly, and key things to look for during the account reconciliation process.

This is done by comparing debit card receipts or check copies with a person’s bank statements. Bank Reconciliation is the process of comparing your business’ books of accounts with your bank statements. It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts. Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts.

According to your online bank balance (which you rely on to monitor your cashflow because your accounting software never seems to be quite up to date), you have $10,000 in the bank. Perhaps the Excel spreadsheet you used to calculate the journal entry has a formula error. Some or all of these will happen at some point in the life of every business. But if you don’t reconcile your accounts regularly, you might not catch mistakes as they arise.

What are 3 types of account reconciliation?

Take my word for it, you don’t want to skip this process, even for a single month. Outside of selling their products and services, one of the most important things a small business owner can do is reconcile their accounts. Account reconciliation is simply the act of reconciling one set of transactions with another set to ensure both sets match. So, it’s time to fully embrace account reconciliation in your business operations.

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. This statement is used by auditors to perform the company’s year-end auditing. 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 get updated automatically.

The bank discovered that the mysterious transaction was a bank error, and therefore, reimbursed the company for the incorrect deductions. Rectifying the bank errors bring the bank statement balance and the cash book balance into an agreement. This type of reconciliation helps businesses maintain accurate financial records and identify any discrepancies, so they always know who owes them money and who they need to pay. In doing so, the business can effectively manage cash flow, ensuring timely payment of bills, and collection of receivables.

Psst…There’s a Better Way to Put Money Back in Your Business!

Over time, these assets can be sold or written off according to their stage in the lifecycle or due to depreciation. Accounts reconciliation helps take stock of the assets that a company has and enables the balance sheet to reflect the true value. The production and delivery of goods or services that the company deals with depend on smooth accounts payables. It is essential to reconcile the balance of accounts payables due to short payments, disputes, early payment discounts, and much more.

Reconcile beginning balance, list and add new transactions, list and subtract payments or other reductions, and compute the ending balance for the period. This schedule of activity should support the general ledger ending balance for each account. The allowance for obsolescence and the inventory valuation at lower of cost or market are reconciling items to consider in the inventory recording and reconciliation processes. The rules vary depending on whether the thief used just your account number or your physical ATM or debit card.

Two Ways to Reconcile an Account

Match the deposits in the business records with those in the bank statement. Compare the amount of each deposit recorded in the debit side of the bank column of the cashbook with credit side of the bank statement and credit side of the bank column with the debit side of the bank statement. Often the cash balance in the book of accounts and the bank accounts may not match.

• Using a double-entry accounting system, as shown below, she credits cash for $2,000 and debits her assets, which is the equipment, by the same amount.
• Sage makes no representations or warranties of any kind, express or implied, about the completeness or accuracy of this article and related content.
• 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.
• It’s also an important outcome, since GL balances flow into a company’s financial statements, which are used for internal and external decision-making.

That’s how we know the financials are accurate — or at least materially correct — every month. According to Investopedia, the definition of account reconciliation is “an accounting process that compares two sets of records to check that figures are correct and in agreement. Account reconciliation also confirms that accounts in the general ledger are consistent, accurate, and complete.”  Reconciliation provides a check on the completeness of your financial data. 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.

It is a general practice for businesses to create their balance sheet at the end of the financial year as it denotes the state of finances for that period. However, you need to record financial transactions throughout the year in the general ledger to be able to put together the balance sheet. If there are any differences between the accounts and the amounts, these differences 2021 pay period calendar could include 27 paychecks need to be explained. Reconciling your bank statements allows you to identify problems before they get out of hand. Tick all transactions recorded in the cash book against similar transactions appearing in the bank statement. Make a list of all transactions in the bank statement that are not supported, i.e., are not supported by any evidence such as a payment receipt.

In cases where staffing doesn’t allow for this day-to-day segregation of duties, account reconciliation can provide an opportunity to catch mistakes or fraud. “Segregation of duties” is another way of saying that it’s better to divide duties between different people, so that no single employee has the opportunity to view and alter financial data. Additionally, the more independent the second source of data is, the higher the internal control value, although any comparative analysis and transactional reconciliation can be helpful. 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.