Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. Bank reconciliation is the process of comparing the balance as per the cash book with https://www.quick-bookkeeping.net/ the balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts.
What happens if you leave it too long to do a bank reconciliation?
There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account.
- To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete.
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- If an error is identified during the reconciliation process, it’s not always at the company’s end.
- Consider performing this monthly task shortly after your bank statement arrives so you can manage any errors or improper transactions as quickly as possible.
Video Explanation of Bank Reconciliation
It is important to note that it takes a few days for the bank to clear the cheques. This is especially common in cases where the cheque is deposited at a bank branch other than the one at https://www.quick-bookkeeping.net/how-do-state-and-local-sales-taxes-work/ which your account is maintained. 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.
Step two: Adjusting your balances
Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality. In a small business, that responsibility usually falls to the owner (or a bookkeeper, if you hire one. If you don’t have a bookkeeper, check out Bench). If not, you’re most likely looking at an error in your books (or a bank error, which is less likely but possible).
In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book. 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.
In this guide, we’ll explain exactly why doing a bank reconciliation is so important, and give you step-by-step instructions on how to complete one. 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. So, this the 6 best accounting software for nonprofits of 2021 means there is a time lag between the issue of cheques and its presentation to the bank. Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque.
A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud. We strongly recommend performing what is the difference between the current ratio and the quick ratio a bank reconciliation at least on a monthly basis to ensure the accuracy of your company’s cash records. A monthly reconciliation helps to catch and identify any unusual transactions that might be caused by fraud or accounting errors, especially if your business uses more than one bank account.