What is Bank Reconciliation? Step-by-Step Guide + Examples

Investigate these discrepancies to ensure you’re not dealing with fraud or misappropriation of funds. Review any outstanding checks and include them in your cash account once they are cleared by the bank. Similarly, when reconciling withdrawals, you might find instances where you recorded a withdrawal twice or recorded an incorrect amount. Bank reconciliation helps you identify such errors and rectify them promptly. Maintain complete documentation throughout the process bank statements, invoices, receipts, and any other related documents. Involves checking the general ledger against detailed records to ensure all accounting entries are posted correctly.

However, businesses with a high transaction volume or increased fraud risk may need to reconcile more frequently, sometimes even daily. The key is to establish a routine that best suits your business’s unique needs and financial activity. The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect bank reconciliation potential errors in the bank’s records. Deposits in transit present a significant factor in the bank reconciliation process.

Systematic checks

The final result is known as your adjusted bank statement and adjusted book balance. Bank reconciliation is essential for safeguarding the accuracy of your financial data and improving decision-making. A key task within accounting, it’s often performed as part of the month-end close process. According to the Association of Certified Fraud Examiners, around 22% of financial statement fraud cases are uncovered through bank reconciliation, highlighting its importance in preventing fraud. Company A paid $3,750 worth of checks into its bank account and debited its cash book accordingly, but the bank has not yet credited the funds to the depositor’s account. As of 30 September 20XX, the ending debit cash balance in the accounting records of Company A was $1,500, whereas its bank account showed an overdraft of $500.

The Bottom Line on Bank Reconciliation

As items are posted to the account, valid charges reconcile instantly while discrepancies trigger alerts. You will get a clear status update when checks are cleared from your register. This automation provides immediate visibility rather than waiting for month-end. Let’s assume that a new company opens its first checking account on June 4 with a deposit of $10,000. During the month of June the company wrote five checks with a total of $5,000.

• 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.
• Comparing internal records with bank statements provides a clear view of your cash position, aiding decision-making.
• A bank reconciliation statement is a summary of recent banking activity that is used to reconcile personal or business records against the bank’s record of transactions.
• Begin by obtaining the latest bank statement and corresponding accounting records for the period under review.

Types of Reconciliation Techniques Used by Businesses

Sign-off also provides a documented record of the review, which can be helpful for audits and internal controls. Interest earned should appear on the bank statement and be added to your internal records. Accurate reconciliation ensures complete records and verifies true balances. It allows businesses to keep their financial records current, directly supporting better financial decisions and stakeholder trust. Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.

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Several items can cause a difference between cash book and passbook balances, these items are typically only reflected in the passbook. In addition to this, the reconciliation process also helps keep track the occurrence of fraud, which can help you control your business’ cash receipts and payments. John Franklin is a staff accountant for the computer hardware company, ABC Widgets, who has been tasked with reconciling the company’s cash accounts for month-end.

Maintaining accurate and reliable financial records is pivotal for organizations. Imagine a scenario where your financial records do not match with your bank statements. While there are many reasons, starting with data entry errors, unauthorized transactions and variances in accounting that might contribute to this, what helps is identifying these discrepancies early on.

This preparation will streamline the reconciliation process and make it easier to identify discrepancies. Every business performs bank reconciliation, but the process varies based on the size of a company, number of bank accounts, and complexity of bank statements. Transactions import and match automatically in real-time rather than waiting for statement issuance.

• Software can quickly compare data, find mistakes, and even recommend fixes.
• Include details such as the beginning balances, outstanding checks, reconciled debit and credit entries, adjustments for both bank and accounting errors, and the reconciled ending balances.
• Even with a well-established bank reconciliation process, businesses often encounter challenges that can complicate the task of matching their bank statement to their accounting records.
• When your books are accurate and up to date, it’s easier to make informed decisions, prepare for tax time, and spot unusual activity.
• To “reconcile” means to bring two records into agreement—your books and your bank’s records.

Such information is not available to your business immediately, so you record no entry in the business’ cash book for the above items. You will know about this only when you receive the bank statement at the end of the month. As a result, your balance as per the passbook would be less than the balance as per the cash book. In this instance, your bank has recorded the receipts in your business account at the bank, while you haven’t recorded this transaction in your cash book. As a result, the balance shown in the bank passbook would be more than the balance shown in your company’s cash book.

The bank also debits its asset account Loans Receivable (causing this asset’s balance to increase). Outstanding checks are checks that a company had written and recorded in its Cash account, but the checks have not yet been paid by the company’s bank (or have not “cleared” the bank). It is common for a few checks written in earlier months to remain outstanding at the end of the current month. However, the depositor/customer/company credits its Cash account to decrease its checking account balance. However, the depositor/customer/company debits its Cash account to increase its checking account balance.

Know Your Business (KYB) is a set of verification procedures that helps companies avoid getting into business with criminals. A banking API is software that facilitates a digital connection between a company and a bank. Now that we have seen some practical examples, let’s delve into the step-by-step process of performing a bank recon.

How to do a bank reconciliation

You’ll have an accurate picture of your real cash balances rather than assumptions. This helps with cash flow decisions like whether you can afford that new equipment purchase this month. For example, you thought you had $5,000 in the bank but holding outstanding checks brings it down to $3,000 instead. Verify that all deposits and withdrawals in your cash account match those on the bank statement.

This adjustment must also be recorded in the company’s general ledger with a credit to Cash and a debit to Bank Fees Expense. Effective bank reconciliation is not just about matching transactions—it’s about ensuring accuracy, efficiency, and strong financial controls. Below are some best practices to help streamline the process, reduce errors, and gain a clearer view of the company’s cash position. You take a payment from your bank statement and match it with a specific bill, invoice, or chart of accounts (COA) document. Reconciliation is a key process in accounting and treasury management that involves comparing two sets of records to make sure they match. Debits and credits are reversed in bank statements–compared to business accounting records–because the bank is showing the transactions from its perspective.