What is Bank Reconciliation
A bank reconciliation is the process of matching the balances in an entity’s accounting records for a cash account to the corresponding information on a bank statement. The goal of this process is to ascertain the differences between the two, and to book changes to the accounting records as appropriate. The information on the bank statement is the bank’s record of all transactions impacting the entity’s bank account during the past month.
How to Do Bank Reconciliation?
To do a bank reconciliation you would match the cash balances on the balance sheet to the corresponding amount on your bank statement, determining the differences between the two in order to make changes to the accounting records, resolve any discrepancies and identify fraudulent transactions.
How Do You Reconcile a Bank Statement?
To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business.
To preform a proper bank statement reconciliation, follow these nine steps:
Start the bank reconciliation process with a comparison of the company’s bank statement and general ledger cash account. Check off all items that match. This part of the reconciliation ensures all items recorded in the general ledger have cleared the company’s bank account. Once an item clears the bank account, it usually represents the finality of that particular business transaction.
2. Add Deposits
Once the comparison process is complete, note all items that remain on the company’s general ledger. Add any deposits in transit to the ending balance. Deposits in transit are deposits that you have recorded in your register but have not appeared on the bank statement.
3. Outstanding Checks
Deduct outstanding checks from the ending balance. These checks have been deducted from your check register, but have not yet cleared the bank.
4. Bank Errors
Add or deduct any bank errors to the ending balance. Examples would be incorrect deposit amounts and incorrect debits.
5. Check Register Reconciliation
Deduct bank service charges. Service charges could be account maintenance fees, check overage fees if you wrote more checks than you are allotted for the month, wire transfer charges, returned check fees, etc.
6. Interest Earned
Add interest earned if you have an interest bearing account.
7. Check Register Errors
Add or deduct errors in the check register. These errors could include posting a payment that was not actually a cash transaction, or omitting a payment.
8. Journal Entries
You may need to prepare journal entries as part of this reconciliation process. These journal entries will correct any errors found during the bank statement and general ledger comparison. Owners can also use journal entries to post any bank statement items into the general ledger if necessary. Once all journal entries are posted, you may re-run the general ledger cash account to update the ending balance for all new posted items.
9. Compare Both Statements
Compare the adjusted bank statement balance per your reconciliation to the adjusted cash balance per the general ledger. The balances should be equal. If the two balances do not match review the steps; verify that the bank balance has been adjusted for all deposits in transit and outstanding checks, and that all activity has been properly posted in the company’s general ledger.