Bank Reconciliation: Purpose, Example, Process

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this post may contain references to products from our partners. However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors.

  • A reconciliation statement may also help support a needs statement upon verification of the current statement balance of a business requesting for grants or funds.
  • The deposit could have been received after the cutoff date for the monthly statement release.
  • In this case, the bank hasn’t honored it due to insufficient funds from an entity’s account.
  • Here, we’ll deep dive into what a bank reconciliation statement is and how to make one, step by step.

Financial statements show the health of a company or entity for a specific period or point in time. Accurate financial statements allow investors to make informed decisions. The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. Such discrepancies can hamper the decision-making prowess of the upper management and prevent your accountants from formulating cohesive financial strategies.

Examples of the cash book, bank statement and bank reconciliation statement

Accurate, up-to-date financial records ensure you have sufficient funds squirreled away in your bank account to cover operating expenses. Plus, let’s not forget that missing information, mistakes and discrepancies in your books can cascade to other issues in running your business. For instance, it can create stumbling blocks and hinder your ability to make well-informed business decisions rooted in accurate data. A bank reconciliation statement can help make sure what’s recorded in your bank account balance is the same as your bank balance. Here, we’ll deep dive into what a bank reconciliation statement is and how to make one, step by step.

The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. A bank reconciliation statement is usually performed regularly—for instance, once a month and every quarter and also at the end of the fiscal year. Similarly, when a business receives an invoice, it credits the amount of the invoice to accounts payable (on the balance sheet) and debits an expense (on the income statement) for the same amount. When the company pays the bill, it debits accounts payable and credits the cash account. Again, the left (debit) and right (credit) sides of the journal entry should agree, reconciling to zero. A bank may charge an account maintenance fee, typically withdrawn and processed automatically from the bank account.

Reduced Human Errors:

If not, transactions are carefully looked at to get to the bottom of discrepancies. To keep a record of business transactions, a Bank Reconciliation Statement (BRS) comes into play. Bank Reconciliation Statement is a statement which records differences between the bank statement and general ledger. The amount specified in the bank statement issued by the bank and the amount recorded in the organization’s accounting book maintained by Chartered Accountant might differ. A BRS checks entries on a monthly basis to avoid any future discrepancy.

What are the Benefits of a Bank Reconciliation Statement?

The objective of doing reconciliations to make sure that the internal cash register agrees with the bank statement. Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health. It is possible to have certain transactions that have been recorded as paid in the internal cash register but that do not appear as paid in the bank statement. An example of such a transaction is a check that has been issued but has yet to be cleared by the bank. When an account is reconciled, the statement’s transactions should match the account holder’s records. For a checking account, it is important to factor in any outstanding checks or pending deposits.

While a business may choose to prepare its bank reconciliation statement at any time, it is best to prepare it once per month after you receive the bank statement for your business. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits. But, you will record such transactions only in your business’ cash book only when you receive the bank statement.

What is Bank Reconciliation?

This often happens when the checks are written in the last few days of the month. When you reconcile, you compare two related accounts make sure everything is accurate and matches. Just like balancing your checkbook, you need to do this review in QuickBooks. You should reconcile your bank and credit card accounts in QuickBooks frequently to make sure they match your real-life bank accounts.

What is bank reconciliation statement (BRS)?

In other words, the adjusted balance as per the bank must match with the adjusted balance as per the cash book. Therefore, you need to deduct the amount of these cheques from your bank balance. However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences.

There might be differences when checks haven’t been cleared, cash hasn’t been deposited or a transaction was incorrectly inputted on the accounting side. If cash hasn’t yet been deposited because an employee is pocketing the money for their own use, then you might have an incident of fraud on your hands. Claire is a senior editor at Newsweek focused on credit cards, loans and banking. Her top priority is providing unbiased, in-depth personal finance content to ensure readers are well-equipped with knowledge when making financial decisions. Another way of performing a reconciliation is via the account conversion method.

The only way to overcome this is to ‘automate’ the bank reconciliation process using accounting software. More importantly, you get accurate and near real-time information on bank balance in books of accounts. The cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement. In these cases, journal entries record any adjustment to the book’s balance. After fee and interest adjustments are made, the book balance should equal the ending balance of the bank account. First, let’s try understanding bank reconciliation statements with a simple example before moving on to more complex ones.

Since these items are generally reported to the company before the bank statement date, they seldom appear on a reconciliation. Therefore, you record no entry in the business’ cash book for the above items. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account.

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