Keeping your financial records in order is hugely important to the success of your business. Read the steps you should take when closing out your small business’ books for the end of the fiscal year. Give your accountant direct access to your books so she can find the reports and information she needs when questions arise.
Step 1: Review your opening balance
- 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.
- As a result, the balance shown in the bank passbook would be more than the balance shown in your company’s cash book.
- To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another.
- 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.
- 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.
If your beginning balance in your accounting software isn’t correct, the bank account won’t reconcile. This can happen if you’re reconciling an account for the first time or if it wasn’t properly reconciled last month. If you reconciled a transaction by mistake, here’s how to unreconcile it. If you adjusted a reconciliation by mistake or need to start over, reach out to your accountant.
With bank statement in-hand, you can systematically check off matching transactions one-by-one by clicking their boxes. The bottom of the screen contains a running total of items you have checked off, and thus have been reconciled. This is useful for comparing the totals in your books to the totals on your bank statement. Once you determine the differences between the balance as per the cash book and the balance as per the passbook, you’ll need work out the balance as per the bank portion of the bank reconciliation statement. When your business receives checks from its customers, these amounts are recorded immediately on the debit side of the cash book so the balance as per the cash book increases. However, there may be a situation where the bank credits your business account only when the checks are actually realised.
Review cleared transactions
At times, the balance as per the cash book and passbook may differ due to an error committed by either the bank or an error in the cash book of your company. There are times cost drivers definition examples when your business will deposit a check or draw a bill of exchange discounted with the bank. These deposited checks or discounted bills of exchange drawn by your business may get dishonored on the date of maturity. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. It is important to note that it takes a few days for the bank to clear the checks. 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.
Bank Reconciliation: Purpose, Example, and Process
If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. While reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. If this occurs, you simply need to make a note indicating the reasons for the discrepancy between your bank statement and cash book. Reconciling bank statements with cash book balances helps your business know the underlying causes of these balance differences.
Example 1: Preparation of Bank Reconciliation Statement Without Adjusting the Cash Book Balance
In QuickBooks, you have the option to make an adjusting entry if the difference isn’t zero when you are finished reconciling. However, adjusting entries should be made only as a last resort for small amounts. There are several reports – such as the The Reconciliation Discrepancy Report, the Missing Checks Report, and the Transaction Detail Report – that can help you identify discrepancies quickly. Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet. Not-sufficient funds (NSF) refers to a situation when your bank does not honour a check, because the current account, on which the check is drawn, has insufficient funds.
In order to prepare a bank reconciliation statement, you’ll need to obtain both the current and the previous month’s bank statements as well as the cash book. The purpose of reconciling bank statements with your business’ cash book is to ensure that the balance as per the passbook matches the balance as per the cash book. Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account. 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. But this is not the case as the bank does not clear an NFS check, and as a result, the cash on hand balance gets reduced. The balance recorded in the passbook or the bank statement must match the balance reflected in the customer’s cash book.
An outstanding check refers to a check payment that has been recorded in the books of accounts of the issuing company, but has not yet been cleared by the bank as a deduction from the company’s cash balance. To reconcile means to “make one view or belief compatible with another.” In accounting, that means making your account balances equal to one another. More specifically, a bank reconciliation means balancing your bank statements with your bookkeeping.