Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. Therefore, it makes sense to first record these items in the cash book to determine the adjusted balance of the cash book. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. This is a simple data entry error that occurs when two digits are accidentally reversed (transposed) when posting a transaction. For example, you wrote a check for $32, but you recorded it as $23 in your accounting software.
As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. This means that the bank balance of the company is greater than the balance reflected in its cash book. Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting. After 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.
- The statement also includes bank charges such as for account servicing fees.
- Using this simple process each month will help you uncover any differences between your records and what shows up on your bank statement.
- A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud.
- However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences.
- It is important to note that it takes a few days for the bank to clear the cheques.
When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you).
Not Sufficient Funds Cheques
To reconcile your bank statement with your cash book, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank. Such errors are committed while recording the transactions in the cash book. As a result, the balance as per the cash book differs from the passbook. However, there may be a situation where the bank credits your business account only when the cheques are actually realised. Such a time lag is responsible for the differences that arise in your cash book balance and your passbook balance.
However, in the bank statement, such a balance is showcased as a debit balance and is known as the debit balance as per the passbook. The above case presents preparing a bank reconciliation statement starting with positive bank balances. As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. This balance exists when the deposits made by your business at your bank are more than the withdrawals.
Document the Process
You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the cheques issued but not yet presented for payment. At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc. At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook.
For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash. 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. For the most part, how often you reconcile bank statements will depend on your volume of transactions. One reason for this is that your bank may have service charges or bank fees for things like too many withdrawals or overdrafts.
What is Bank Reconciliation?
There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February). If there’s a discrepancy between your accounts and the bank’s records that you can’t explain any other way, it may be time to speak to someone at the bank. You will know about such information only when you receive the bank statement at the end of the month. 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 which your account is maintained.
Company
When you look at your books, you want to know they reflect reality. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate. Reconciliation is the process of comparing two different records. A bank reconciliation statement can help you identify differences between your company’s bank and book balances. How you choose to perform a bank reconciliation depends on how you track your money. Some people rely on accounting software or mobile apps to track financial transactions and reconcile banking activity.
First, check your two cash balances
Note that this process is exclusively for reconciliations performed by hand. If you use accounting software, then your reconciliation is done largely for you. However, as a business owner, it’s important to understand the reconciliation process. The reconciliation statement allows the accountant to catch these errors each month.
Failing to Account for Bank Fees and Charges:
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. From the following particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2021.
