Bank Reconciliation Explanation

Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet. This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook. You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee. The goal is to get your ending bank balance and ending G/L balance to match. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared.

  1. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank.
  2. It features separate tabs for the bank statement and the company’s cash book and includes a ‘Reconciliation Notes’ column to highlight any transactions that don’t match up.
  3. This template also includes a section for errors on the depositor’s books, ensuring that every minor detail is accounted for.
  4. This template allows you to compare and reconcile your bank statement with your own records.
  5. You’ll need to account for these fees in your G/L in order to complete the reconciliation process.

In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. Regular preparation of the bank reconciliation statements ensures transparency in financial transactions. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement. This process helps you monitor all of the cash inflows and outflows in your bank account. The reconciliation process also helps you identify fraud and other unauthorized cash transactions.

Step #2: Work Out the Balance as Per Bank Side of the Bank Reconciliation Statement

However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book. The bank will debit your business account only when the bank pays these issued cheques. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. These items are typically service fees, overdraft fees, and interest income.

The template includes lines for assets such as cash, accounts receivable, inventory, and investments, along with liabilities, including accounts payable, loans, and payroll. Add your own line items to this Excel sheet, and the template will automatically calculate the totals. However, the depositor/customer/company credits its Cash account to decrease its checking account balance. Bank Example 2 showed that the bank debits the depositor’s checking account to decrease the checking account balance (since this is part of the bank’s liability Customers’ Deposits).

The bank reconciliation also provides a way to detect potential errors in the bank’s records. 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 a result, the balance as per the bank statement is lower than the balance as per the cash book.

Enter the first day of the month, and the template will fill in subsequent dates, providing a detailed look at daily cash flow. The template also shows the ending cash position so that you can quickly see if it reconciles with your balance sheet. This article will explain how to create various types of bank reconciliation statements. To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book.

Step #3: Work Out the Balance as Per Cash Book Side of the Bank Reconciliation Statement

Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document. Such a time lag is responsible for the differences that arise in your cash book balance and your passbook balance. However, in the bank statement, such a balance is showcased as a debit balance and is known as the debit balance as per the passbook. The above case presents preparing a bank reconciliation statement starting with positive bank balances. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank.

Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank. When done frequently, reconciliation statements help companies identify cash flow errors, present accurate information to investors, and plan and pay taxes correctly. They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding. 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.

Bank Account Reconciliation Template from MSOfficeGeek

Here are two examples to reinforce the bank’s use of debit and credit with regards to its customers’ checking accounts. Next, we look at how a bank uses debit and credit when referring to a company’s checking account transactions. 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. Next, check to see if all of the deposits listed in your records are present on your bank statement.

This template offers a structured layout for tracking and reconciling all your credit card transactions. It simplifies the complex process of bank reconciliation, making it accessible for anyone, regardless of their financial background. It is also necessary to contact the bank immediately for any bank errors that were discovered in order for the bank account to be corrected. 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.

Feeling bogged down by repetitive processes and redundant work?

It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts. With this template, you can easily track your bank balances and transactions. It includes sections for your bank name, statement balance, bank phone, account number, and statement date. You can also add deposits in transit, subtract outstanding checks, and compute your book balance. Save time, protect financial assets, and increase accuracy with free bank reconciliation templates. You can customize all of the templates offered below for business use or for reconciling personal accounts.

It’s designed to help you proactively identify and resolve issues that could lead to misstatements in your financial records. The template automatically calculates the adjusted checkbook and statement balances, and indicates if these balances match, making it easy to spot any discrepancies. It’s perfect for those who want to ensure the accuracy of their financial statements, track discrepancies, and maintain proper control over their cash flow. The template usually consists of various sections that help track and reconcile all transactions, including deposits, withdrawals, checks, and other financial activity.

This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared. Such errors are committed while recording the transactions in the cash book. At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook. For instance, the bank charged your business $30 in service fees, but it also paid you $5 in interest.

If you’re finding withdrawals that aren’t listed on the bank statement, do some investigation. If it’s a missing check withdrawal, it’s possible that it hasn’t been cashed yet or wasn’t cashed by the statement deadline. How you choose to perform a bank reconciliation depends on how you track your money. Some people rely on accounting software or mobile apps to track financial transactions and reconcile banking activity. Others use a paper checkbook, and balance it each month, to keep a record of any written checks and other transactions.

However, the depositor/customer/company debits its Cash account to increase its checking account balance. When the bank debits a depositor’s checking account, the depositor’s checking account balance and the bank’s liability to the customer/depositor are decreased. Match the deposits in the business records with those in the bank statement. To quickly identify and how to compute vertical analysis address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly. Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available.

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