Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. After you’ve received bank statements, establish the last reconciled transaction from the previous period and begin there. In double-entry accounting, each transaction is posted as both a debit and a credit.

Step 5: Compare end balances

There are bank-only transactions that your company’s accounting records most likely don’t account for. To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another. More specifically, a bank reconciliation means balancing your bank statements with your bookkeeping. To create a bank reconciliation, you will need to gather your bank statements and reconcile them with your accounting records (ledger). Regularly creating a bank reconciliation statement allows you to find errors by comparing your company ledger with your bank statement. If you’re using accounting software, it may give you the option to connect your bank account so transactions are automatically downloaded and categorized.

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1. That means it hasn’t been reflected in the bank statements, yet it’s recorded in your cash book, so you need to deduct it from your records.
2. Unexplained or mysterious discrepancies may warn of fraud or cooking the books.
3. If they are still not equal, you will have to repeat the process of reconciliation.
4. On 30th September, the bank debited bank charges to $300 on account of annual maintenance charges plus cheque dishonor charges.

These may include deposits in transit, outstanding checks, bank fees, or miscalculations by the bank or the internal accounting team. You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business, as well as any expenses paid by the business. This includes everything from wages and salaries paid to employees to business purchases like equipment and materials.

Discrepancies in bank reconciliations can arise from data processing errors or delays and unclear fees at the bank. Unpredictable interest income may also be a challenge when calculating financial statements, which can lead to challenges during a bank reconciliation. Conducting regular bank reconciliation helps you catch any fraud risks or financial errors before they become a larger problem.

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Read on to learn about bank reconciliations, use cases, and common errors to look for. The need and importance of a bank reconciliation statement are due to several factors. First, bank reconciliation statements provide a mechanism of internal control over cash. Bank reconciliation isn’t just important for maintaining accurate business finances—it also ensures your customer and business relationships remain strong. Regular bank reconciliation double-checks that all payments have been accurately processed. This includes payments by customers to your company and payments from your company to employees, contractors, and other goods and services providers.

Interest is automatically deposited into a bank account after a certain period of time. So the company’s accountant prepares an entry increasing the cash currently shown in the financial records. After adjustments are made, the book balance should equal the ending balance of the bank account. A bank reconciliation statement can help you identify differences between your company’s bank and book balances. Reconciliation statements are a useful tool for both internal auditors and external auditors. Internal auditors examine reconciliation statements largely for the same reasons, as well as to ensure that the accounting staff is actually establishing credit terms for customers preparing these documents.

Making sure a company’s and its bank’s listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process also enables the company to record any interest payments the account has earned or fees the bank has charged. Individuals should reconcile bank and credit card statements frequently to check for erroneous or fraudulent transactions.