8 Easy Steps to Reconcile a Bank Statement & Best Practices
In simple words, to eradicate two different versions of the same document. Therefore, you need to deduct the amount of these cheques from your bank balance. However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences. As mentioned above, bank overdraft is a condition where which of the following is not a step in preparing a bank reconciliation? a bank account becomes negative as a result of excess withdrawals over deposits. This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook. With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.
These adjustments that may be missing from your G/L typically include service fees, overdraft fees, and interest income. Before the end of the month (i.e. time of BRS generation) if a company issues a cheque and it is not handed for payment, it would not be counted as debit amount. Such cheques are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment. Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account. However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment. One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts.
Financial Accounting
There is no accounting treatment for these differences as they will clear with time. Apart from fraud, bank reconciliation can also help a company detect errors. Performing regular bank reconciliation can help the company identify any issues within its internal processes related to bank transactions that may result in errors.
The bank reconciliation is an internal document prepared by the company that owns the checking account. Chron states that math errors, outstanding checks and electronic fees, are the most common reasons for discrepancies. This may occur because someone inside the business has recorded putting money in the bank but not actually deposited it.
Order To Cash
It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely. However, connecting your accounting software to your bank or financial institute does not take the place of doing a month-end bank reconciliation. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side.
The easiest way to check for this is to print a check register for the month and compare it to the checks that have cleared the bank. Any checks that have been issued that haven’t cleared the bank must be accounted for under your bank balance column. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days.
How to do a bank reconciliation
Once the initial check is complete, mark all items remained in the ledger. Add any transit deposits accounted in ledgers that might not appear in the bank statement. Hence, the case of transit deposits occurs due to transactions made just before bank holidays or non-working hours. Since both the company’s books and the bank statement have an adjusted balance of $6,975 the bank statement has been reconciled.