Bank Reconciliation Definition & Example of Bank Reconciliation

At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc. Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited. If you want to prepare a bank reconciliation statement using either of these approaches, you can take balance as per the cash book or balance as per the passbook as your starting point. Once you have checked total withdrawals and deposits, you should balance.

Because reconciling items that affect the book balance on a bank reconciliation have not been recorded in the company’s books, they must be journalized and posted to the general ledger accounts. The $1,565 credit memorandum requires a compound journal entry involving four accounts. Cash is debited for $1,565, bank fees expense is debited for $25, notes receivable is credited for $1,500, and interest revenue is credited for $90.

Examine Bank Withdrawals and Expenses

Since the Vector Management Group paid Ad It Up $63 more than the books show, a $63 debit is made to decrease the accounts payable balance owed to Ad It Up, and a $63 credit is made to decrease cash. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties.

• It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts.
• The $1,565 credit memorandum requires a compound journal entry involving four accounts.
• Although separate journal entries for each expense can be made, it is simpler to combine them, so bank fees expense is debited for $70 and cash is credited for $70.
• This error is a reconciling item because the company’s general ledger cash account is overstated by $63.

Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned. Now, while reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. In any case, those items that reconcile the general ledger (book balance) to the adjusted bank balance (the target) have to be recorded. Interest income reported on the bank statement has usually not been accrued by the company and, therefore, must be added to the company’s book balance on the bank reconciliation. The final transaction listed on the Vector Management Group’s bank statement is for $18 in interest that has not been accrued, so this amount is added to the right side of the following bank reconciliation.

Make Necessary Adjustments in the Balance as per cash book

Guess what else we do when we post this $350 to Accounts Receivable? The subsidiary ledger is a list of all customers, alphabetically (most likely) and the amount each one owes. The GL is organized not by customer, but by date (chronologically).

• The depositor should also check carefully to see that the bank did not combine the transactions of the two accounts.
• He is the sole author of all the materials on AccountingCoach.com.
• For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account.
• Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement).
• If that kind of error happens, we have to do some research and contact the bank to make sure it gets corrected, but we do not have to change our books.

Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. Furthermore, each of the items is matched with your books of accounts. Bank Reconciliation is the process of comparing your business’ books of accounts with your bank statements. It is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts. Bank reconciliation is the process of comparing the balance as per the cash book with the balance as per the passbook (bank statement).

Bank Reconciliation Statement

To prevent collusion among employees, the person who reconciles the bank account should not be involved in the cash disbursement cycle. Also, the bank should mail the statement directly to the person who reconciles the bank account each month. Sending the statement directly limits the number of employees who would have an opportunity to tamper with the statement. The ending cash balance on the GL is now reconciled to the adjusted bank statement balance. Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Completing the challenge below proves you are a human how to calculate cost of inventory and gives you temporary access. You come to know about such deductions only when you receive the statement from the bank. However, there can be situations where your business has overdrafts at the bank.

Bank Reconciling Statement: Adjusting Balance per Bank

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. Journal entries are required in a bank reconciliation when there are adjustments to the balance per books. These adjustments https://online-accounting.net/ result from items appearing on the bank statement that have not been recorded in the company’s general ledger accounts. In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time.

Therefore, a $345 debit is made to increase the accounts receivable balance of Hosta, Inc., and a $345 credit is made to decrease cash. Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, every week, or even at the end of each day in case of businesses having a huge number of transactions. In such a case, your bank has recorded the receipts in your business account at the bank. However, you did not record such a transaction in your cash book. As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book.

Once the journal entries are recorded, the general ledger is prepared. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals. After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts. If you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information. Before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement.

In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business. Therefore, the bank needs to add back the cheque’s amount to the bank balance. 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. To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank. When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book.

You must post the journal entries of all the adjustments made to the balance as per the cash book. Once you post the journal entries into your company ledger accounts, make sure that the cash account balance is equal to the adjusted balance per cash book shown in the bank reconciliation statement. Banks use debit memoranda to notify companies about automatic withdrawals, and they use credit memoranda to notify companies about automatic deposits. To the bank, however, a company’s checking account balance is a liability rather than an asset. Therefore, from the bank’s perspective, the terms debit and credit are correctly applied to the memoranda.

Bank Reconciliation: Purpose, Example, and Process

As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement. When a company maintains more than one checking account, it must reconcile each account separately with the balance on the bank statement for that account.