How to Reconcile a Bank Statement: 7 Easy Steps to Follow
Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles. Errors could include omission, entering the wrong amount, or recording an item to the incorrect account.
Why Do We Do a Bank Reconciliation?
When a company writes a check, the company’s general ledger Cash account is credited (and another account is debited) using the date of the check. Therefore, a check dated June 29 will be recorded in the company’s accounts using the date of June 29, even if the check clears (is paid through) the company’s bank account one week later. As you know, the balances in asset accounts are increased with a debit entry. Catching mistakes prevents surprise overdraft fees or bounced checks which average $30 per incident. Say you record a customer deposit twice by accident making your register balance higher.
Payment
These balances sit side-by-side in your auto-generated reconciliation report each month. Start by getting the most recent bank statement from your banking provider. This could be a physical copy or a digital version, depending on how your bank provides statements. Make sure you have access to all necessary statements, especially if you’re reconciling multiple bank accounts.
Complete the Necessary Journal Entries
Add or subtract all reconciling items from the bank’s ending cash balance for your account, and compare the result to your own record of the ending cash balance. Otherwise, there is still a reconciling item within the current period that you have not yet identified. Match each of the deposits in your records to those noted on the bank statement. Begin by aligning the bank Opening Entry account balance with the cash balance on your company’s balance sheet. By keeping an eye on these common issues, you’ll significantly reduce the chances of running into trouble during bank reconciliation.
Regular Process Reviews
One of the most valuable benefits of reconciliation is increased internal control. Frequent checks make it easier to spot unusual transactions—like unauthorized withdrawals or fraudulent checks—so you can react bank reconciliation quickly and keep your business safe. Understanding these terms will help you follow the steps and appreciate the importance of bank reconciliation as you manage your bookkeeping processes. Company errors may require additions or subtractions from the company’s general ledger Cash account. One type of error is a transposition error which involves the switching of digits within an amount.
- Voided checks are those that should not have cleared but somehow appear as debits in your bank statement.
- Keeping financial data accurate and up-to-date helps businesses remain compliant with accounting standards.
- These checks are deducted from the bank balance but are not yet reflected in the company’s books.
- KlearStack streamlined our invoice reconciliation and improved data integration.
- After making all necessary adjustments, your book balance should match the ending balance on your bank statement.
- In cases where you discover discrepancies that cannot be explained by your financial statements, it’s best to contact your bank.
It’s a key step in the month-end close that helps you verify every transaction and confirm that the books match the bank, giving you and your clients a reliable view of their cash position. Bank reconciliations are one of the most important parts of your closing process to produce financial statements. We’re going to use the example of a company called GadgetFlow Inc. to walk through the steps of reconciling a bank account. Match each deposit and withdrawal on your bank statement with your accounting records carefully. Identify any outstanding checks or deposits that have not yet cleared the bank.
Tag: Financial Accounting Records
You should consider our materials to be an introduction to selected accounting and bookkeeping topics (with complexities likely omitted). We focus on financial statement reporting and do not discuss how that differs from income tax reporting. Therefore, you should always consult with accounting and tax professionals for assistance with your specific circumstances. The bottom line of both sides of the bank reconciliation must be the same amount. In other words, Adjusted balance per BANK must equal Adjusted balance per BOOKS. 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.
Direct Payments
- By understanding the common causes of discrepancies and following a consistent step-by-step process, you can keep every account clean, accurate, and audit-ready.
- A bank reconciliation statement is a document that compares the cash balance on a company’s balance sheet to the corresponding amount on its bank statement.
- Not every mismatch means an error—some stem from timing differences between when transactions are recorded and when they clear the bank.
- In this journey, making use of modern accounting tools and adopting best practices are your keys to efficiency and accuracy.
- It is important to understand these fees and charges to ensure accurate reconciliation of bank accounts.
- By performing regular bank reconciliations, companies can ensure that their financial records are accurate and up-to-date.
A look at the processes, best practices, + tools to help you streamline your month-end close. If your discrepancy is divisible by 9, there’s a good chance it’s a transposition error. Incorrectly applied or unapplied cash means collection teams may chase customers who have already paid, invoice the wrong amounts, or fail to follow up when money is still owed. This creates frustration for customers and undermines the credibility of the finance team. Michelle Payne has 15 years of experience as a Certified Public Accountant with a strong background in audit, tax, and consulting services. She has more than five years of experience working unearned revenue with non-profit organizations in a finance capacity.
Consistency in how your team reconciles accounts reduces the risk of errors and discrepancies. Even with the best systems in place, mistakes can happen during bank reconciliation. Most errors come down to small oversights—like a typo, a forgotten transaction, or a misplaced number. While they might seem minor at first, these issues can add up over time and throw off your books in a big way.
Automating Bank Reconciliation: Benefits
Before starting the reconciliation, you should have a copy of your bank records for the period that you’re reconciling along with any relevant accounting records. Finally, completing a bank reconciliation regularly can help make audits an easier process, since all banking and general ledger activity has already been reviewed for accuracy. For instance, you may have written a check to the plumber who was in last week to fix a leaky faucet and failed to record it in your accounting software application. A reconciliation can also assist with spotting possible errors reflected in the general ledger or on the bank statement. For a variety of reasons, the balance on your bank statement will rarely match your book balance or general ledger balance.