Bank Reconciliations: Everything You Need to Know Bench Accounting

Performing regular bank reconciliations helps you stay on top of cash flow, keep organized records for tax season, and minimize the risk of fraud and theft. We’ll explore the definition of bank reconciliation, why it’s important, and a step-by-step process for performing bank reconciliations. We’ll also look at common sources of discrepancies between financial statements and bank statements to help you identify fraud risks and errors. Performing regular bank reconciliations is key to keeping on top of your company’s financial health and paving the way for sustainable business growth.

The Benefits of Reconciling Your Bank Account

1. As a result, the bank statement balance will be lower than the cash book balance, so the difference will need to be adjusted in your cash book before preparing the bank reconciliation statement.
2. He has been quoted by publications like Readers Digest and The Wall Street Journal.
3. Greg adds the $11,500 of deposits in transit to his bank statement balance, bringing him to $99,500.
4. This is an important fact because it brings out the status of the bank reconciliation statement.

A bank reconciliation statement is prepared by a depositor (account holder) to overcome differences in the balances of the cash book and bank statement. The bank will debit your business account only when they’ve paid these issued checks, meaning there is a time delay between the issuing of checks and their presentation to the bank. These time delays are responsible for the differences that arise in your cash book balance and your passbook balance. Income from variable sources like interest and investment revenue vs profit may be difficult to predict.

Adjustments to the Cash Account

When your business issues a check to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash ytd financial definition of ytd book. However, there might be a situation where the receiving entity may not present the checks issued by your business to the bank for immediate payment. This way, the number of items that can cause the difference between the passbook and the cash book balance is reduced.

We strongly recommend performing 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. Reconciling bank statements with cash book balances helps your business know the ‎quickbooks accounting on the app store underlying causes of these balance differences. Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can then make the necessary corrections in your books to ensure accuracy. Human error in the data entry process can sometimes lead to incorrect amounts or miscalculations on a business’s financial statements.

Why Is It Important To Reconcile Your Bank Statements?

Bank reconciliation statements are tools companies and accountants use to detect errors, omissions, and fraud in a financial account. Bank reconciliation is a simple and invaluable process to help manage cash flows. It’s important to perform a bank reconciliation periodically to identify fraudulent activities or bookkeeping and accounting errors. This way, you can ensure your business is in solid standing and never be caught off-guard. You need to determine the underlying reasons responsible for any mismatch between balance as per cash book and passbook before you record such changes in your books of accounts.

There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them. 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. Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support.

This includes everything from major fraud and theft to accounting miscalculations, insufficient funds, and incomplete or duplicated payments. By comparing the two statements, Greg sees that there are $11,500 in checks for four orders of lawnmowers purchased near the end of the month. These checks are in transit, so they haven’t yet been deposited into the company’s bank account.