During September, the company received $120,000 from sales and invoiced debtors $40,000 the previous month, and received a check that has not yet been reflected in the bank account. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control.
Step 4: Make adjustments to the books
The reason could be that deposits are in transit or outstanding checks have not yet been reflected. You need to make sure that all the deposits you’ve recorded in the books reflect in the bank statement. Match each deposit from the debit side of your record to the credit side on the bank statements while ensuring that the amounts correspond. As a result, you’ll need to deduct the amount of these checks from the balance. Such information is not available to your business immediately, so you record no entry in the business’ cash book for the above items.
How Often Should You Reconcile Your Bank Account?
These debits made by the bank directly from your bank account will lead to a difference between balances. Cash what are generally accepted accounting principles management software allows for scalability, making it easy to streamline the reconciliation process as the business grows. Standardizing the process with a set of steps to follow for reconciliation can make the process more organized and save time.
As a small business, you may find yourself paying vendors and creditors by issuing check payments. If you use accounting software, then your reconciliation is done largely for you. However, as a business owner, it’s important to understand the reconciliation process.
An online template can help guide you, but a simple spreadsheet is just as effective. In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period. After checking all the critical items, adjust the cash balances to account for all expenses and transactions. Plan to complete reconciliations monthly so you don’t risk accumulating a large number of discrepancies, which could be difficult to track. If done regularly, a bank reconciliation easily helps you identify discrepancies so that you can adjust them.
All of this can be done by using online accounting software like QuickBooks, but if you are not using accounting software, you can use Excel to record these items. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits, and once these are recorded, the general ledger is prepared. It is important to note that it takes a few days for the bank to clear the checks.
What Should You Do if You Cannot Reconcile Your Account?
If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements at regular intervals (more on that below). If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you. Any credit cards, PayPal accounts, or other accounts with business transactions should be reconciled. When you “reconcile” your bank statement or bank records, you compare it with your bookkeeping records for the same period, and pinpoint every discrepancy. Then, you make a record of those discrepancies, so you or your accountant can be certain there’s no money that has gone “missing” from your business. If your beginning balance in your accounting software isn’t correct, the bank account won’t reconcile.
- If you’ve earned any interest on your bank account balance, it must be added to the cash account.
- Once you complete the bank reconciliation statement at the end of the month, you need to print a bank reconciliation report and keep it in your monthly journal entries as a separate document.
- For example, you wrote a check for $32, but you recorded it as $23 in your accounting software.
- If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business.
- Your books may not match the bank statements because the bank has added expenses.
Timing Differences in Recording of Transactions
We’ll also look at common sources of discrepancies between financial statements and bank statements to help you identify fraud risks and errors. Performing regular bank reconciliations is key to keeping on top of your company’s financial health and paving the way for sustainable business growth. A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud. The point of the bank reconciliations is to record these known timing differences and attempt to reconcile the bank statement balance to the cash book balance. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than expected, which may result in bounced checks or overdraft fees.
A bank reconciliation is the process by which a company compares its internal financial statements to its bank statements to catch any discrepancies and gain a clear picture of its real cash flow. Before you reconcile your bank account, you’ll need to ensure that you’ve recorded all transactions from your business until the date of your bank statement. If you have access to online banking, you can download the bank statements when conducting a bank reconciliation at regular intervals rather than manually entering the information.
