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At times, your customers may directly deposit funds into your business’ bank account, but your business will not notified about this the bank statement is received. The purpose of preparing a bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. Likewise, ‘credit balance as per cash book’ is the same as ‘debit balance as per passbook’ means the withdrawals made by a company from a bank account exceed deposits made. NSF checks are an item to be reconciled when preparing the bank reconciliation statement, because when you deposit a check, often it has already been cleared by the bank.

1. Compare the ending balance of your accounting records to your bank statement to see if both cash balances match.
2. One of the primary reasons this happens is due to the time delay in recording the transactions of either payments or receipts.
3. Regular bank reconciliation double-checks that all payments have been accurately processed.
4. Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them.
5. If your company receives bank statements more frequently, for example, every week, you may also choose to do a bank reconciliation for every statement you receive.

While it cannot entirely erase the potential for data processing errors, using accounting software can reduce the likelihood of errors to help generate more accurate financial statements. If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.

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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. After including all the amounts identified in Step 3, your statements should display the same final balance. If any discrepancies cannot be identified and reconciled, it may signal an error or risk of fraud which your company can investigate further. While this will cause a discrepancy in balances at the end of the month, the difference will automatically correct itself once the bank collects the checks. The firm’s account may contain a debit entry for a deposit that was not received by the bank prior to the statement date. One of the procedures for what is the journal entry for accrued income establishing the correct cash balance (and for controlling cash) is the reconciliation of the bank and book cash balances.

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Companies prepare bank reconciliation statements as a comprehensive accounting comparison tool. A company can ensure that all payments have been processed accurately by comparing their internal financial records against their bank account balance. Bank reconciliation statements are also important for alerting a company in case of fraud or error. To be effective, a bank reconciliation statement should include all transactions that impact a company’s financial accounts. A bank reconciliation is an essential process for ensuring accounts receivable ledger that your company’s financial statements match the available cash in your business bank account.

Compare the Deposits

Financial statements show the health of a company or entity for a specific period or point in time. The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions. As a result, you’ll need to deduct the amount of these checks from the balance. In this instance, your bank has recorded the receipts in your business account at the bank, while you haven’t recorded this transaction in your cash book. As a result, the balance shown in the bank passbook would be more than the balance shown in your company’s cash book.

Unpredictable interest income may also be a challenge when calculating financial statements, which can lead to challenges during a bank reconciliation. There could be transactions unaccounted for in your personal financial records because of a bank adjustment. This may occur if you were subject to any fees, like a monthly maintenance fee or overdraft fee. For interest-bearing accounts, a bank adjustment could be the amount of interest you earned over the statement period. A bank reconciliation statement is only a statement prepared to stay abreast with the bank statement; it is not in itself an accounting record, nor is it part of the double entry system.

They might reconcile on a daily basis to make sure everything matches and all cash receipts hit the bank account. On the other hand, a small online store—one that has days when there are no new transactions at all—could reconcile on a weekly or monthly basis. Once you’ve raw materials inventory definition figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the mail today, I promise! Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid). Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening.