Bank Reconciliation Definition & Example of Bank Reconciliation

You come to know about such deductions only when you receive the statement from the bank. So, this means there is a time lag between the issue of cheques and its presentation which of the following is not a step in preparing a bank reconciliation? to the bank. However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment.

Similarly, if there are deposits appearing in the bank statement but are not in the cash book, add the entries to the cash book balance. There are bank-only transactions that your company’s accounting records most likely don’t account for. To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another. More specifically, a bank reconciliation means balancing your bank statements with your bookkeeping.

Add bank-only transactions to your book balance

A bank reconciliation is part of the month-end close process, which includes reviewing the company’s balance sheet, income, bank statements, expenses, intercompany trades, and other information. It is essential for maintaining accurate business financial records, which helps in tax filing and getting an overall idea of the company’s finances. 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. Bank reconciliation is a crucial financial task for businesses and individuals alike.

Depending on the significance of these differences, this could cause problems related to cash flow and could result in fines or penalties for unpaid bills. The reconciliation has been successful if the same balance appears in the accounts of both companies, with it being a debtor in one company’s books and a creditor in the other’s. This, in essence, ensures that the consolidated accounts eliminate any artificial profit/loss from intercompany transactions. 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.

Why is Bank Reconciliation Important in Financial Analysis?

More importantly, bank reconciliation can play a crucial role in catching any fraudulent activity. For example, employees may exploit loopholes in the internal control of a company to their advantage. Therefore, bank reconciliation is the best option that companies have of detecting or sometimes detecting the error before it’s too late. 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. Compare the cash account’s general ledger to the bank statement to spot the errors.

Such a process determines the differences between the balances as per the cash book and bank passbook. This bank statement is an example of the transactions that occurred during the month. ABC Co. can start from the adjusted bank book balance and adjust the timing differences to it to reach the bank statement balance. It can also adjust the balances to the bank statement to reach the adjusted bank book balances instead. The next step in preparing a bank reconciliation statement is to identify the reason for the differences.

Bank reconciliations are a must

However, the depositor/customer/company credits its Cash account to decrease its checking account balance. However, the depositor/customer/company debits its Cash account to increase its checking account balance. Next, we look at how a bank uses debit and credit when referring to a company’s checking account transactions.

You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the cheques issued but not yet presented for payment. Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. From the following particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2021.

Bank Reconciliation: Purpose, Example, and Process

Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance. If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the issue. However, in reality, there are often still discrepancies due to timing issues related to transactions (i.e. cash in transit) or errors from external providers (i.e. omitted transactions).

Cash management software allows for scalability, making it easy to streamline the reconciliation process as the business grows. Cash management software allows businesses to gather real-time cash positions across the organization, helping to make better business decisions based on accurate data. Not producing a reconciliation report when one is needed will also make it more time consuming to produce future reconciliations, due to it being harder to unpick the differences. In these instances, a reconciliation report needs to be produced, which quantifies and explains the reasons for the closing balance between the two data sources.