Bank Reconciliation: Purpose, Example, Process

This is especially common in cases where the check is deposited at a different bank branch than the one at which your account is maintained, which can lead to the difference between the balances. This way, the number of items that can cause the difference between the passbook and the cash book balance is reduced. And as a result, it gets easier to ascertain the correct balance in the balance sheet.

Make Necessary Adjustments in the Balance as per the Cash Book

However, there might be a situation where the receiving entity may not present the checks issued by your business to the bank for immediate payment. If you want to prepare a bank reconciliation statement using either of these approaches, you can use the balance as per the cash book or balance as per the passbook as your starting point. These outstanding deposits must be deducted from the balance, as per the cash book, in the bank reconciliation statement. Deposits in transit, or outstanding deposits, are not showcased in the bank statement on the reconciliation date.

Once you’ve completed the balance as per the bank, you’ll then need to work out the balance as per the cash book. At times, you might give standing instructions to your bank to make payments regularly on specific days to third parties, such as insurance premiums, telephone bills, rent, sales taxes, etc. (If you’re in the middle of reconciling, stay on the page you’re how to calculate purchase price variance ppv and exchange rate variance on and skip to step 4). It’s recommended to focus on one account at a time to maintain precision. When you’re done reviewing your statement, you’ll know everything made it into QuickBooks. Before you start with reconciliation, make sure to back up your company file.

Compare your bank statements

1. Nowadays, all deposits and withdrawals undertaken by a customer are recorded by both the bank and the customer.
2. There are bank-only transactions that your company’s accounting records most likely don’t account for.
3. These deposited checks or discounted bills of exchange drawn by your business may get dishonored on the date of maturity.
4. These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement.

If everything matches, you know your accounts are balanced and accurate. When all these adjustments have been made to the books of accounts, the balance as how are period costs and product costs different per the cash book must match that of the passbook. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly.

Step 2: Work Out the Balance as Per Bank Side of the Bank Reconciliation Statement

To see all of your adjustments on the list, you can review a Previous Reconciliation report for the reconciliation you adjusted. This will show you cleared transactions and any changes made after the transaction that may not show in your discrepancies. This is a simple data entry error that occurs when two digits are accidentally reversed (transposed) when posting a transaction. For example, you wrote a check for $32, but you recorded it as $23 in your accounting software.

It ensures accurate financial records and helps in identifying discrepancies early on. Keeping your financial records in order is hugely important to the success of your business. Read the steps you should take when closing out your small business’ books for the end of the fiscal year. Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits, and once these are recorded, the general ledger is prepared. As a result of these 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. These debits made by the bank directly from your bank account will lead to a difference between balances.

There are times when the bank may charge a fee for maintaining your account, which will typically be deducted automatically from your account. Therefore, when preparing a bank reconciliation statement you must account for any fees deducted from your account. Make sure that you’ve also taken into account all deposits and withdrawals to an account when preparing the bank reconciliation statement.

We recommend setting the opening balance at the beginning of a bank statement. Book transactions are transactions that have been recorded on prepaid rent is what type of account your books but haven’t cleared the bank. As a small business, you may find yourself paying vendors and creditors by issuing check payments. There are bank-only transactions that your company’s accounting records most likely don’t account for.