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A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe.
Many companies produce bank reconciliation statements regularly to ensure they’ve recorded all their banking transactions properly and that their ending balance matches the amount the bank says they have.
What is the purpose of a bank reconciliation statement?
Bank reconciliation statements can help identify accounting errors, discrepancies and fraud. For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement does not show such a deposit, there may have been a mistake or fraud.
Making sure a company’s and its bank’s listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process enables the company to record any interest payments the account has earned or fees the bank has charged.
The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable.
How to do a bank reconciliation
Before sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements. You can get a template online to use for your bank reconciliation statement, or you can use a spreadsheet.
Step 1: Find the starting balance
If you’re doing a reconciliation every month, your starting balance will be the final balance from the previous month.
Step 2: Review the deposits and withdrawals
Check your ledger’s recorded deposits, withdrawals and cleared checks against those listed on the bank statement. Ensure all of the amounts match up, and investigate any discrepancies. Everything listed on the bank statement should be included in your records and vice versa.
Step 3: Adjust the cash balance
Starting with your bank statement balance, add any deposits you’ve made that have not yet cleared. Likewise, deduct any checks that have yet to clear. Your result is the adjusted cash balance. Adjusting the cash balance ensures your ledger’s balance and the bank statement balance will match.
Step 4: Account for interest and fees
Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement. Also, deduct any penalties or fees the bank assessed that your ledger doesn’t list.
Step 5: Compare end balances
After reviewing all deposits and withdrawals, adjusting the cash balance and accounting for interest and fees, your ledger’s ending balance should match the bank statement balance. If the two balances differ, you’ll need to look through everything to find any discrepancies. These could be your errors or the bank’s.
Bank reconciliation example
Regularly creating a bank reconciliation statement allows you to find errors by comparing your company ledger with your bank statement. Then, you can correct your records as needed.
For instance, say your company’s ledger has a recorded ending balance for a given month of $350,000. However, the bank statement lists an amount of $347,000. In comparing your ledger with the bank statement, you find that the record of a company check for $3,000 was inadvertently omitted from your book. You add the check to your records, and now the two balances match up.
A bank reconciliation statement is important in managing your business’ finances. This document can help ensure that your bank account has a sufficient balance to cover company expenses. It’s a tool for understanding your company’s cash flow and managing accounts payable and receivable. If you haven’t been using bank reconciliation statements, now is the best time to start.