Bank Reconciliation: A Beginner’s Guide

The fictional company ABC Painters is conducting a bank reconciliation as part of their end-of-month procedures. If the balances don’t match, it’s up to the company to investigate the “why” behind these discrepancies and figure out why the two balances aren’t one and the same. Claire is a senior editor at Newsweek focused on credit cards, loans and banking. Her top priority is providing unbiased, in-depth personal finance content to ensure readers are well-equipped with knowledge when making financial decisions. With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.

  • Therefore, the expenses of the company will be misstated and go against the prudence concept of accounting.
  • If a company has more than one bank accounts, it will need to carry out the process for each account separately.
  • This is to confirm that all uncleared bank transactions you recorded actually went through.
  • Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account.

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 again. To do this, businesses need to take into the cost of deferred revenue account the bank charges, NSF checks and errors in accounting. 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.


If not, contact the bank immediately and inform them of the error. Bank reconciliation is a subset of the monthly, quarterly, and yearly close process and is not generally done on its own. Accountants spend a lot of time on this step to ensure the checks are thorough and even minute errors are spotted. Here are two examples to reinforce the bank’s use of debit and credit with regards to its customers’ checking accounts.

  • Examples of unrecorded differences are any type of bank charges, taxes, direct deposits, standing orders, dishonored cheques, or a customer deposited an amount but didn’t notify the business, etc.
  • It can also save money by keeping a closer eye on the company’s finances and identifying any discrepancies or errors.
  • The company carries over the balance from its bank book to its trail balance and, subsequently, its financial statements.
  • A business can have many different bank accounts in different banks and, therefore, will receive multiple statements from each bank for each account of the business.
  • Compare your personal transaction records to your most recent bank statement.

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. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money.

These errors are then investigated properly to ensure they were not committed intentionally. These differences are adjusted against the bank statement balance but are not recorded in the bank statement. These are differences that will appear in the bank statement after some time, most probably in the next bank statement. The end balance of your business bank account and financial statements will serve as the starting point for the next bank reconciliation go-round.

Make Necessary Adjustments in the Balance as per cash book

So, this means there is a time lag between the issue of cheques and its presentation 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. Kevin Payne is a personal finance and travel writer who covers credit cards, banking, and other personal finance topics. In addition to Forbes, his work has been featured by Bankrate, Fox Business, Slick Deals, and more.

How Often Should You Reconcile Your Bank Account?

Match each line item from your accounting ledger to your bank statement. If there are any discrepancies, add the transactions of what’s missing. A bank reconciliation statement is usually performed regularly—for instance, once a month and every quarter and also at the end of the fiscal year. Reconcile all transactions and ensure that the closing balances match on the balance sheet and the bank statements. In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary. Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement.

Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there. However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days. This is probably the most important step in the entire bank reconciliation process. Bank reconciliation statements are tools companies and accountants use to detect errors, omissions, and fraud in a financial account.

Helpful Tips for Bank Reconciliation Adjustments

That is because it can help the company detect any irregularities easily and fix them on time. On the other hand, for companies with a low level of bank activity, not preparing bank reconciliations is also an option. 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. While outstanding checks refer to checks that have been paid by the company but not presented by its suppliers.

Another example is a cheque that the business received from the customer but hasn’t yet taken to the bank or did take to the bank, but the bank did no clear the cheque before the end of the month. Other benefits of bank reconciliation include possible fraud protection as well as the ability to gain highly valuable insights about your cash position on a regular basis. Bank reconciliations are a great way to guarantee the correctness of your books at the end of each period and provide a sort of insurance that the books have been kept accurately. However, if you run a smaller business with less transactions, such as ten transactions a week, you may only need to reconcile each month or quarter in order to stay on top of your cash position.

Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque. This is because the current account on which the cheque is drawn does not have sufficient funds to honour the cheque. Before the end of the month (i.e. time of BRS generation) if a company issues a cheque and it is not handed for payment, it would not be counted as debit amount.

Stop Payment Order is a company’s instruction to its bank to not pay a specific check that the company had already written but was not yet paid by the bank. These checks will have the word “VOID” clearly written across the front of the check. This means there is a difference of $1,850 between the two balances. Since there is a difference between the two, the next step should be followed. This will now be the starting date for your next bank reconciliation.

If the balances match, which is rare but still possible, a bank reconciliation statement is not needed. 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.

This reduces your bank balance as reflected in your bank statement. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. For some companies, though, preparing the bank reconciliation again may not be an option. 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.