How to Do a Bank Reconciliation: Step-By-Step 2023

For instance, if you haven’t reconciled your bank statements in six months, you’ll need to go back and check six months’ worth of line items. Whether this is a smart decision depends on the volume of transactions and your level of patience. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account, and plan how you collect and spend money accordingly. In each case the bank reconciliation journal entries show the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section.

You will ultimately be comparing what your bank’s records are against your own. The balance per book (Cash In Bank account) is overstated, and reduction is appropriate. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

  • This is done to confirm every item is accounted for and the ending balances match.
  • In case you are not using accounting software, you can use Excel to record such items.
  • In these cases, journal entries record any adjustment to the book’s balance.
  • The reconciling items in this transaction have not been recorded in the company’s book and will definitely affect the book balance on the bank reconciliation statement.
  • Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees.

These checks will also need to be considered during the reconciliation process. We didn’t create a new account for the collection fee; we just used our existing bank fees account. However, if this kind of thing happened a lot, we might want to have a tracking account for those collection fees specifically. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

Bank Reconciliation Statement Template

A bank reconciliation statement can help you identify differences between your company’s bank and book balances. 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. Journal entries are required in a bank reconciliation when there are adjustments to the balance per books. These adjustments result from items appearing on the bank statement that have not been recorded in the company’s general ledger accounts. When discrepancies arise between the company’s accounting records and the bank statement, it is essential to make appropriate bank reconciliation journal entries. Cloud accounting software like Quickbooks makes preparing a reconciliation statement easy.

  • When recording interest income, in a bank reconciliation, the journal entry usually increases the Cash in Bank and Interest Income account.
  • In other words, the adjusted balance as per the bank must match with the adjusted balance as per the cash book.
  • Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
  • The original journal entry ABC made to record the check received from the customer services performed in exchange for cash was a credit of $350 to Service Revenue and a debit of $350 to Cash Account.
  • In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary.

The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. Not only does the bank provide basic checking services, but they process credit card transactions, keep cash safe, and may finance loans when needed. The journal entry for a customer’s check that was returned due to insufficient funds will debit Accounts Receivable and will credit Cash. You will be increasing your cash account by $5 to account for the interest income, while you’ll be reducing your cash account by $30 to account for the bank service fee. These items are typically service fees, overdraft fees, and interest income. You’ll need to account for these fees in your G/L in order to complete the reconciliation process.

Resources for Your Growing Business

All of this can be done by using online accounting software like QuickBooks. In case you are not using accounting software, you can use Excel to record such items. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account.

These adjusting entries for bank reconciliation result from the reconciling items that appear on the bank statement but have not been recorded in the company’s general ledger accounts. In accounting, carrying out a bank reconciliation at the end of a financial period is very important to ensure that the financial records of a company are correct. Making the necessary bank reconciliation journal entries helps to eliminate any discrepancies between the bank statement figures and the figures on the company’s books. In this article, we will discuss the journal entries for bank reconciliations with examples. One of the bank reconciliation journal entries is the adjusting entry made to correct an error made by the company or bank. Sometimes, errors can be made by companies and banks, thus, every transaction on the bank statement and books should be checked thoroughly.

Video Explanation of Bank Reconciliation

This means the bank has made an adjustment to your account that has not been recorded in your G/L. When you’re completing a bank reconciliation, the biggest difference between the bank balance and the G/L balance is outstanding checks. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days. This is probably the most important step in the entire bank reconciliation process.

Step two: Adjusting your balances

Next, look for any outstanding checks, which are checks issued but not yet cleared by the bank. Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. To do this, a reconciliation statement known as the bank reconciliation statement is prepared. Bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct.

Most business accounts are set up to run monthly, though some older accounts may have a mid-month end date. Once you have checked total withdrawals and deposits, you should balance. Make sure you begin at the last point that both your bank statement and company records matched. However, if you haven’t been diligent in performing this duty monthly, start where you last left off.

Accountants and bookkeepers

The journal entry to record an amount on an NSF check is one of the bank reconciliation journal entries. In business, a check that was previously recorded as part of a deposit may likely bounce due to insufficient funds in the issuer’s checking account; such checks are called not sufficient funds (NSF) checks. In such a situation, the bank returns the check to the depositor and deducts the amount from the account.

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. Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both sides mentioned at the bottom match. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. Therefore, you record no entry in the business’ cash book for the above items.

The bank sends the account statement to its customers every month or at regular intervals. After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts. If you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information. Before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement. But, you will record such transactions only in your business’ cash book only when you receive the bank statement.