How to Do a Bank Reconciliation: Step-By-Step Process

For some entrepreneurs, reconciling bank transactions creates a sense of calm and balance. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. Consider when or why you might need to look back through your financial records for your bank reconciliation, and which method of recording will make the task easier for you based on how you keep your records.

Further, make sure that the bank’s statement for the current month has also been obtained from the bank. Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document. However, there may be a situation where the bank credits your business account only when the cheques are actually realised. When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book.

Bank Reconciliation (Explanation)

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. This practical article illustrates the key points of why a bank reconciliation is important for both business and personal reasons. The second entry required is to adjust the books for the check that was returned from Berson. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February).

• The party receiving the check may not have deposited it immediately.
• Depending on how you choose to receive notifications from your bank, you may receive email or text alerts for successful deposits into your account.
• Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .
• This statement is used by auditors to perform the company’s year-end auditing.
• Before joining Forbes Advisor, Mitch worked for several sites, including Bankrate, Investopedia, Interest, PrimeRates and FlexJobs.

A check previously recorded as part of a deposit may bounce because there are not sufficient funds in the issuer’s checking account. The Vector Management Group’s bank statement includes an NSF check for $345 from Hosta, Inc. Banks often require customers to pay monthly account fees, check printing fees, safe‐deposit box rental fees, and other fees. Unrecorded service charges must be subtracted from the company’s book balance on the bank reconciliation.

Once deposited, checks may take several days to clear the banking system. Determine the outstanding checks by comparing the check numbers that have cleared the bank with the check numbers issued by the company. Use check marks in the company’s record of checks issued to identify those checks returned accounts receivable by the bank. Checks issued that have not yet been returned by the bank are the outstanding checks. If the bank does not return checks but only lists the cleared checks on the bank statement, determine the outstanding checks by comparing this list with the company’s record of checks issued.

What Are Some Best Practices for Managing and Clearing Outstanding Checks?

This often happens when the checks are written in the last few days of the month. Companies may authorize a bank to automatically transfer funds into or out of their account. Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable), monthly utility bills, or other liabilities. Automatic deposits occur when the company’s checking account receives automatic fund transfers from customers or other sources or when the bank collects notes receivable payments on behalf of the company.

Adjust for Outstanding Checks

When a company writes a check, the company’s general ledger Cash account is credited (and another account is debited) using the date of the check. Therefore, a check dated June 29 will be recorded in the company’s accounts using the date of June 29, even if the check clears (is paid through) the company’s bank account one week later. The easiest way to find these adjustments when completing a bank reconciliation is to look at the bank fees. You’ll also want to look at any miscellaneous deposits that haven’t been accounted for. Once you locate these items, you’ll need to adjust your G/L balance to reflect them. Those payments are recorded in your G/L, but they have yet to hit the bank.

Required Information to Create a Bank Reconciliation Statement

In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book. When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book. This means that the bank balance of the company is greater than the balance reflected in its cash book. In general, all businesses should do bank reconciliation once a month.

The purpose of reconciliation is to match the bank statement balance to your book balance adjusted for uncleared items. The difference should always be zero and finishing out of balance and letting QB create an adjusting entry is just kicking the can down the road. Deposits in transit, outstanding checks, and bank service charges usually account for the difference between the company’s Cash account balance and the bank balance. In the past, it was common for a company to prepare the bank reconciliation after receiving the monthly bank statement and before issuing the company’s balance sheets. However, with today’s online banking a company can prepare a bank reconciliation throughout the month (as well as at the end of the month). This allows the company to verify its checking account balance more frequently and to make any necessary corrections much sooner.

Note that Community Bank credits its liability account Customers’ Deposits (which includes the individual depositor’s checking account balance). As a result, Community Bank’s balance sheet will report an additional $10,000 in assets and an additional $10,000 in liabilities. It’s common for your bank statement to have a higher ending balance than your G/L account shows.

One way to avoid this occurrence is to maintain a balanced checkbook. This can help prevent any unnecessary NSFs if the payee decides to cash the check at a later date. Outstanding checks also provide the opportunity for payment delays, which can be advantageous when it comes to managing cash flow. Even if the checkwriter has sufficient funds, any delay from the depositor simply means higher interest revenue on the capital balance waiting to be drawn down. An overdraft occurs when the account holder who wrote a check that is still pending does not have enough money in their account to cover the amount of the check when it is eventually submitted for payment.

In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals. When you do a bank reconciliation, you first find the bank transactions that are responsible for your books and your bank account being out of sync.

Immediately investigate any deposit made during the month but missing from the bank statement (unless it involves a deposit made at the end of the period). However, all the items in the second half of the reconciliation (or on the right side, if you are preparing the bank reconciliation in two side-by-side columns) need to be recorded in our GL. We do this recording with either (a) regular journal entries or (b) adjusting journal entries. As you may have realized by now, there really isn’t much difference between the two in an old-fashioned paper system. However, in an automated system, the normal daily transactions would be entered through various forms and processes, such as the cash receipts module or accounts payable and cash disbursements. This decision is a combination of (a) the system you are using, (b) your internal accounting process, and (c) internal control constraints.