One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts. Therefore, such adjustment procedures help in determining the balance as per https://www.kelleysbookkeeping.com/ the bank that goes into the balance sheet. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. The goal is to get your ending bank balance and ending G/L balance to match.
It is a best practice to check that their balance sheet numbers are accurate and match the bank statement. If any discrepancies or fraudulent charges are identified, the required changes are made to the balance sheet. The information on your bank statement is the bank’s record of all transactions impacting the company’s bank account during the past month. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match. The company found there are $3,000 deposits in transit and $2,000 outstanding checks. As mentioned above, deposits in transit are cheques that the bank has not cleared yet.
Review: What are bank reconciliations?
This is accomplished by scanning the two sets of records and looking for discrepancies. If you find any errors or omissions, determine what happened to cause the differences and work to fix them in your records. For some companies, though, preparing the bank reconciliation again may not be an option.
If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook. Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account https://www.quick-bookkeeping.net/ over the amount deposited. 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 easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank.
Unrecorded items are different from timing differences as the company needs to record these differences in its bank book as well. Therefore, unrecorded differences will have an accounting treatment. Bank reconciliation is a part of the internal control process of a company. As mentioned above, two different documents show the bank balance of a company at the end of a specific period.
When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book. When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. After adjusting all the above items, what you get is the adjusted balance as per the cash book. This means that the bank balance of the company is greater than the balance reflected in its cash book. If the indirect method is used, then the cash flow from the operations section is already presented as a reconciliation of the three financial statements. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts.
Step 3: Compare checks and adjust bank total
The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you). If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below).
- As mentioned above, two different documents show the bank balance of a company at the end of a specific period.
- If the payment is not recorded in the bank statement, it will make a difference.
- This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank.
- You’ll need to figure out if it was a sale, interest, a refund, or something else.
- The company prepares the bank book while its bank prepares the bank statements.
Further, make sure that the bank’s statement for the current month has also been obtained from the bank. When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book. Now, such a figure is shown as a credit balance in your cash book.
Therefore, unrecorded differences will change the balance in the bank book of the company. Since these differences alter the balance on the bank book, the adjustments need to take place before further reconciliation takes place. Timing differences are items that cause a difference between the balances in the bank statement and bank book due to the timing of transactions. These differences generally comprise two types of items, outstanding checks, and deposits in transits, also known as outstanding lodgments. An outstanding check is a check that a company pays another party, but the party does not present it to the bank.
Overview of Bank Reconciliation
The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors https://www.online-accounting.net/ to the bank. Outstanding checks are those that have been written and recorded in cash account 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.
These are categories of discrepancies that cause a difference in the balances between the balances in the bank book and bank statement. Account reconciliation is particularly useful for explaining any differences between two financial records or account balances. Some differences may be acceptable because of the timing of payments and deposits.
Once these figures are verified, the company can safely assume the error is somewhere in the bank charges or small amounts. Therefore, it can expense out the difference without any consideration to what may have caused it. On the other hand, deposits in transit are the opposite of outstanding checks.
When preparing a bank reconciliation statement, a journal entry is prepared to account for fees deducted. Bank reconciliation statements are effective tools for detecting fraud, theft, and loss. For example, if a check is altered, the payment made for that check will be larger than you anticipate.