Bank Reconciliation: Purpose, Example, Process

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. 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 suspect an error in your books, see some common bank reconciliation errors below. Once the balances are equal, businesses need to prepare journal entries to adjust the balance per books. After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation.

Deductions from a cash account:

Taking the time to perform a bank reconciliation can help you manage your finances and keep accurate records. This relatively straightforward and quick process provides a clear picture of your financial health. Consider reconciling your bank account monthly, whether you set aside a specific day each month or do it as your statements arrive. 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.

The balance recorded in the passbook or the bank statement must match the balance reflected in the customer’s cash book. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank. Bank reconciliation isn’t just important for maintaining accurate business finances—it also ensures your customer and business relationships remain strong. Regular bank reconciliation double-checks that all payments have been accurately processed.

You have to go back and compare your records with the bank’s to try and figure out what went wrong so you can correct your records to match the banks. One reason for this is that your bank may have service charges or bank fees for things like too many withdrawals or overdrafts. Or there may be a delay when transferring money from one account to another. Or you could have written a NSF check (not sufficient funds) and recorded the amount normally in your books, without realizing there wasn’t insufficient balance and the check bounced. 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.

1. An online template can help guide you, but a simple spreadsheet is just as effective.
2. A bank reconciliation statement is only a statement prepared to stay abreast with the bank statement; it is not in itself an accounting record, nor is it part of the double entry system.
3. And as a result, it gets easier to ascertain the correct balance in the balance sheet.
4. 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.

Add book transactions to your bank balance

Subtract any drawn checks that have been written to make a payment but not yet cleared by the bank. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. We book vs market value follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

Step 3 of 3

This helps you anticipate any cash flow challenges so you can respond appropriately. Financial accuracy is also important for ensuring that all payments have been fulfilled and orders have been completed. Greg’s January financial statement for the company shows $100,000 in cash, but the bank statement shows only $88,000. Bank errors are mistakes made by the bank while creating the bank statement. Common errors include entering an incorrect amount or omitting an amount from the bank statement. These miscalculations can also occur on the business’s financial records.

As a result, bank transactions can be automatically imported into an accounting software, where one is able to categorize and match a large number of transactions with one click of a button. This significantly reduces the effort that goes into the reconciliation process and enables businesses to verify their cash balances anytime throughout the month. Notice cash flow statement that there are no journal entries posted for the bank statement adjustments (Step 1) because those are only used in the reconciliation process to calculate at the “correct” adjusted cash balance. Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors.

Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis. 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). If there’s a discrepancy between your accounts and the bank’s records that you can’t explain any other way, it may be time to speak to someone at the bank. Bench simplifies your small business accounting by combining intuitive software that automates the fair value vs market value busywork with real, professional human support.