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June 16, 2022 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. NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area. 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. Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank. Similarly, the bank too keeps an account for every customer. 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. Sometimes these balances do not match. The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match. To do this, a reconciliation statement known as the bank reconciliation statement is prepared. Bank Reconciliation: A Step-by-Step GuideYou receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees. Once you’ve received it, follow these steps to reconcile a bank statement: 1. COMPARE THE DEPOSITSMatch the deposits in the business records with those in the bank statement. Compare the amount of each deposit recorded in the debit side of the bank column of the cashbook with credit side of the bank statement and credit side of the bank column with the debit side of the bank statement. Mark the items appearing in both the records. 2. ADJUST THE BANK STATEMENTSAdjust the balance on the bank statements to the corrected balance. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. They must be added to the bank statement. Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account. They need to be deducted from the bank balance. This often happens when the checks are written in the last few days of the month. Bank errors are mistakes made by the bank while creating the bank statement. Common errors include entering an incorrect amount or omitting an amount from the bank statement. Compare the cash account’s general ledger to the bank statement to spot the errors. 3. ADJUST THE CASH ACCOUNTThe next step is to adjust the cash balance in the business account. Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting.
4. COMPARE THE BALANCESAfter adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again. Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books. How Often Should You Reconcile Your Bank Account?Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month, weekly and even at the end of each day by businesses that have a large number of transactions. Before the reconciliation process, business should ensure that they have recorded all transactions up to the end of your bank statement. Businesses that use online banking service can download the bank statements for the regular reconciliation process rather than having to manually enter the information. What Is the Purpose of Bank Reconciliation?The bank reconciliation process offers several advantages including:
Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. This makes the bank reconciliation process efficient and controllable. More Resources on Small Business AccountingRELATED ARTICLES Did you know? You can earn our Bank Reconciliation Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium bank reconciliation materials. These include our visual tutorial, flashcards, cheat sheet, quick tests, quick test with coaching, and more. Note: You can earn any or all of our Certificates of Achievement for Bank Reconciliation, Debits and Credits, Adjusting Entries, Financial Statements, Balance Sheet, Income Statement, Cash Flow Statement, Financial Ratios, Working Capital and Liquidity, and Payroll Accounting when you upgrade your account to PRO Plus. In accounting, a company's cash includes the money in its checking account(s). To safeguard this critical and tempting asset, a company should establish internal controls over its cash. These controls include separating the accounting duties of its employees, depositing all receipts into the company's checking account, paying all bills through the checking account, and having an independent person routinely prepare a bank reconciliation (bank rec, bank statement reconciliation), and more. The purpose of the bank reconciliation is to be certain that the company's general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank's records. The bank reconciliation process requires some tedious tasks. For example,
The adjustments based on the above differences will be added or subtracted from one of the following amounts:
A condensed version of our format for the bank reconciliation is shown here: Notice the following items in the condensed bank reconciliation format:
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. Accounting for Cash at the CompanyIt is helpful for a company to have a separate general ledger Cash account for each of its checking accounts. For instance, a company will have one Cash account for its main checking account, a second Cash account for its payroll checking account, and so on. For simplicity, our examples and discussion assume that the company has only one checking account with one general ledger account entitled Cash. As you know, the balances in asset accounts are increased with a debit entry. Therefore, when a company receives money (currency, checks), the company debits its general ledger asset account Cash and credits another account using the date that the money was received (not the date the money is deposited at its bank). For example, if a company receives $900 on Saturday, June 29, the debit to the Cash account (and the credit to another account) will show the date of June 29, even if the money is deposited in the bank account on Tuesday, July 2. 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 above transactions are common occurrences that illustrate two important points:
Next, we look at how a bank uses debit and credit when referring to a company's checking account transactions. Accounting at the BankTo appreciate a bank's use of the terms debit, debit memo, credit, and credit memo, let's take a brief look at a few of the bank's assets and liabilities:
When a bank customer deposits $900 in its bank checking account, the bank's asset Cash is increased with a debit entry, and the bank's liability Customers' Deposits is increased with a credit entry. The bank's liability has increased because the bank has the liability/obligation to return the customer's checking account balance to the customer on demand When the bank increases a customer's/depositor's checking account balance, the banker might say that the depositor's checking account was credited. (The credit entry does indeed increase both the depositor's checking account balance and the bank's liability.) When the bank debits a depositor's checking account, the depositor's checking account balance and the bank's liability to the customer/depositor are decreased. Here are two examples to reinforce the bank's use of debit and credit with regards to its customers' checking accounts. Bank Example 1. Assume that a new company opens a checking account at Community Bank with a deposit of $10,000. Community Bank records the deposit in the bank's general ledger as follows:
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. Bank Example 2. Assume that a company pays its August rent of $1,000 by writing a check on August 1. Three days later, the landlord cashes the check at Community Bank. While the company had recorded the $1,000 check in its general ledger accounts with the date of August 1, Community Bank's transaction occurs on August 4. Therefore, using the date of August 4, the bank will record this entry in the bank's general ledger:
This transaction results in the bank's assets decreasing by $1,000 and its liabilities decreasing by $1,000. Comparing Accounting: Bank vs. CompanyBank Example 1 showed that the bank credits the depositor's checking account to increase the depositor's checking account balance (since this is part of the bank's liability Customers' Deposits). However, the depositor/customer/company debits its Cash account to increase its checking account balance. Bank Example 2 showed that the bank debits the depositor's checking account to decrease the checking account balance (since this is part of the bank's liability Customers' Deposits). However, the depositor/customer/company credits its Cash account to decrease its checking account balance. Page 2In this section we provide brief definitions of the terms commonly used when discussing checking accounts and bank reconciliations. We grouped the terms into the following categories:
General Terms for Checking AccountsChecking accounts are known as demand deposit accounts since the bank must pay/return the depositors' account balances (except for uncollected funds) on demand. Companies report the checking account balances as part of its cash. Companies should safeguard their checking accounts through internal controls, which includes timely bank reconciliations prepared by an independent person. Checks are a company's written orders to its bank to pay an amount from the company's checking account. Hence, checks state "Pay to the order of ______". The person or company named on the check is known as the payee. The payee is required to endorse (sign the back of) the check as evidence that the money was received. (In place of the endorsement, a bank can indicate that the amount was deposited/credited to the payee's bank account.) Cancelled checks are the checks the company issued and were paid by the company's bank. Cancelled checks are also referred to as checks that "cleared" the bank account on which they are drawn. Voided checks are checks that were written in error. These checks will have the word "VOID" clearly written across the front of the check. Stop payment order is a company's instruction to its bank to not pay a specific check that the company had already written but was not yet paid by the bank. Generally, the bank charges a fee for the special effort required by the customer's order. Deposits often consist of currency and checks (received from customers) that a company takes to its bank with instructions to add the amount to the company's checking account. The bank records the deposit with the date the bank processes the deposit. (However, the company's general ledger Cash account shows the date that the company had received the money from its customers or others.) Authorized signers are a limited number of people designated to sign checks drawn on the company's checking account. Their names and signatures appear on a bank signature card along with the approval of the company's key officers. Bank overdraft occurs when checks written by a company are presented to its bank for payment and the company's checking account balance is not sufficient to pay the checks. If the checks were to be paid, the checking account balance would become a negative amount. Without a prior arrangement with the bank (such as an automatic loan), the bank will likely return or "bounce" the check back to the endorser. (The related terms NSF check and return item are described under Terms for Adjustments to the Balance per Books.) Uncollected funds occur when a company deposits a check into its bank account, but the check is drawn on an account at a different bank. Since the company's bank is not certain that the check will be honored by the bank on which it is drawn, the company's bank will not allow the company/depositor to use the amount until the deposited check is paid by the other bank. (Some people refer to the amount of outstanding checks as the company's float.) Terms for Adjustments to the Balance per BankOutstanding checks are checks that a company had written and recorded in its Cash account, but the checks have not yet been paid by the company's bank (or have not "cleared" the bank). It is common for a few checks written in earlier months to remain outstanding at the end of the current month. Since the outstanding checks are not yet in the bank's records/bank statement, the company's bank reconciliation will show the outstanding checks as a subtraction from the balance per bank. Deposits in transit are the cash and checks a company has received and recorded in its general ledger accounts, but the cash and checks have not been processed by the bank as of the date of the bank reconciliation. Deposits in transit are sometimes referred to as outstanding deposits. Since the deposits in transit are not yet recorded in the bank's records, the company's bank reconciliation will show the deposits in transit as an addition to the balance per bank. Bank errors are mistakes made by the bank that were discovered when the company prepared the bank reconciliation. While these items are rare, they do occur. For example, if a company issues a check for $867, but the bank paid the check at the incorrect amount of $876, there is a $9 bank error. This bank error will be shown on the company's bank reconciliation as an addition of $9 to the unadjusted balance per bank (since the bank had reduced the bank account by $9 too much). The company should immediately contact the bank so the bank can make the correction to the company's checking account balance. (There is no entry made by the company since the company's general ledger Cash account already contains the correct amount of $867.) Terms for Adjustments to the Balance per BooksBank credit memos indicate that the bank increased the balance in a company's checking account. For example, if a bank lends $50,000 to a company, the bank is likely to deposit the loan proceeds in the company's checking account by means of a credit memo. A bank credit memo is recorded in the bank's general ledger with a credit to the bank's liability account Customers' Deposits (causing this liability's account balance to increase). The bank also debits its asset account Loans Receivable (causing this asset's balance to increase). If the bank's credit memo was not recorded in the company's general ledger accounts as of the date of the bank reconciliation, the company lists the credit memo amount as an adjustment to increase the balance per books. This adjustment must also be recorded in the company's general ledger with a debit to Cash and a credit to Loans Payable or Notes Payable. Bank debit memos indicate that the bank has decreased the balance in a company's checking account. Examples include bank fees (service charge, overdraft fee, stop payment fee, etc.) and loan payments. A bank debit memo is recorded in the bank's general ledger with a debit to the bank's liability account Customers' Deposits (and a credit to another account). If the amount of the debit memo was not recorded in the company's general ledger accounts as of the date of the bank reconciliation, the company lists the debit memo amount as a decrease to the balance per books. This adjustment must also be recorded in the company's general ledger with a credit to Cash and a debit to Bank Fees Expense. ACH, EFT, Zelle transfers, and wire transfers can indicate additions to or subtractions from a company's bank account without the company preparing a deposit slip or writing a check. ACH is the acronym for Automated Clearing House. EFT is the acronym for Electronic Funds Transfer. If any of these transfers were not recorded in the company's general ledger as of the date of the bank reconciliation, the company will list them on the bank reconciliation as adjustments to the balance per books. The company must record these transfers in its general ledger accounts. NSF check is a check issued by a company, but the bank did not pay/honor the check because the company's bank balance was less than the amount of the check. Unless the company had arranged for this situation, the company's bank is likely to return the check to the endorser (instead of allowing the checking account to have a negative balance.) When the bank returns the NSF check, the check will be noted as Not Sufficient Funds (NSF) or Insufficient funds. An NSF check is also known as a check that "bounced" or as a "rubber check" (since the check is being bounced back by the bank). Return item is typically a check that was not paid/honored by the bank on which it was drawn. A few examples include an NSF check, a check drawn on a checking account that was closed, and a check where the maker of the check has stopped payment. Company errors may require additions or subtractions from the company's general ledger Cash account. One type of error is a transposition error which involves the switching of digits within an amount. For example, the amount $789 might be incorrectly recorded as $798, resulting in a difference of $9. Perhaps $1,458 was recorded as $1,548, resulting in a difference of $90. Another type of error involves omitting or adding a zero, such as recording $500 instead of the actual amount of $5,000 (a difference of $4,500). In these types of errors, the differences are evenly divisible by 9: $9/9 = 1; $90/9 = 10; $4,500/9 = 500. If your bank reconciliation does not balance and the difference is evenly divisible by 9, you may be able to rule out many amounts in your effort to identify the error. Helpful Tip for Bank Reconciliation AdjustmentsAs a guide to listing the adjustments on the bank reconciliation, you may find the following is both helpful and easy to remember: Two examples of this TIP are shown next. Outstanding check Bank service charge Page 3The process for preparing the bank reconciliation of a company's checking account includes:
We suggest the following five steps for preparing a bank reconciliation: Step 1. Compare every amount on the bank statement (or in the bank's online information) with every amount in the company's general ledger Cash account and note any differences.
Step 2. Complete the Balance per BANK side of the bank reconciliation format. The Balance per BANK side of the bank reconciliation requires the following:
Step 3. Complete the Balance per BOOKS side of the bank reconciliation format. The Balance per BOOKS side of the bank reconciliation requires the following:
Step 4. Be certain that the bank reconciliation shows Adjusted balance per BANK = Adjusted balance per BOOKS. The bottom line of both sides of the bank reconciliation must be the same amount. In other words, Adjusted balance per BANK must equal Adjusted balance per BOOKS. Note: Having the Adjusted balance per BANK = Adjusted balance per BOOKS does not guarantee that the company's cash has been completely accounted for. For instance, if an employee had stolen some of the company's cash receipts before the money was recorded in the company's accounts (and obviously not deposited in the company's bank account) the missing amount will not be detected by the bank reconciliation. Step 5. Record in the company's general ledger the adjustments to the balance per BOOKS. Since the adjustments to the balance per the BOOKS have not been recorded as of the date of the bank reconciliation, the company must record them in its general ledger accounts. For example, if one of the adjustments to the balance per BOOKS is a $25 service charge (that was on the bank statement on May 31, 2021 but not yet recorded in the company's general ledger), the company must post the following entry: Note: After recording/posting the adjustments to the general ledger accounts, it is important to confirm that the company's general ledger Cash account balance is indeed equal to the Adjusted balance per BOOKS shown on the bottom line of the bank reconciliation. Next, we will prepare a bank reconciliation for a hypothetical company by using transactions that are commonly encountered. Sample of a Company's Bank Reconciliation with AmountsIn this section we will prepare a June 30 bank reconciliation for Lee Corp using the five steps discussed above. Step 1. Compare every amount on the bank statement (or the bank's online information) with every amount in the company's general ledger Cash account and note any differences. After comparing every item on the bank statement (checks paid, deposits processed, other items) with every item in Lee Corp's general ledger Cash account (checks written, money received, other items), we listed the differences and other pertinent information in the table that follows. (The letter in the "Item" column will be shown on the bank reconciliation next to the amount.) Keep in mind our TIP: Put the item where it isn't. This means:
Step 2. Complete the Balance per BANK side of the bank reconciliation format. Step 3. Complete the Balance per BOOKS side of the bank reconciliation format. Step 4. Be Certain the Adjusted Balance per BANK = Adjusted Balance per BOOKS. Since the Adjusted balance per BANK of $1,719 is equal to Adjusted balance per BOOKS of $1,719, the bank statement of June 30 has been reconciled. Step 5. Record in the company's general ledger the adjustments to the balance per BOOKS. Recall that the adjustments to the balance per BOOKS will require accounting entries for the items to be posted to the company's general ledger accounts. For each of the adjustments shown on the Balance per BOOKS side of the bank reconciliation, a journal entry is required. Each journal entry will affect at least two accounts, one of which is the company's general ledger Cash account. [Note: The company does not make accounting entries for the adjustments to the bank's records.] The following are the necessary entries for the adjustments to the balance per BOOKS. We reference each entry as E, F, B, D, G, C, or K, as indicated on the right side of the bank reconciliation. Adjustment E Adjustment F Adjustment B Adjustment D Adjustment G Adjustment C Adjustment K Note: After the above entries are posted to the general ledger accounts, it is important to confirm that the balance in the Cash account is equal to the Adjusted balance per BOOKS shown on the bank reconciliation. It is also necessary to contact the bank immediately for any bank errors that were discovered in order for the bank account to be corrected.
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