How To Do Bank Reconciliation in 4 Steps Example+Template

Total of the accounts receivable written off during the year. In a bank reconciliation the outstanding checks are a deduction from the bank balance (or balance per the bank statement). Accounts receivable (often abbreviated A/R) are simply unpaid customer invoices and any other money owed to you by your customers. The sum of all your customer accounts receivable is listed as a current asset on your balance sheet.

Suppose you run a business called Greg’s Popsicle Stand. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened. Plus, there’s something Zen about bank reconciliations.

What is a bank statement?

Preparing a bank reconciliation when you receive your bank statement every month helps you verify the amount of cash in your checking account. Your daily cash receipts should generally be the same amount as your daily bank deposit. Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates. Decide how frequently you’ll reconcile, then stick to it. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. And it will keep you in tune with your business’s cash flow.

Total amount of replenishment that needs to be requested from Cash Management to replenish the bank account. Note that replenishments are to be completed at least every 90 days or sooner. Or you might share a joint account with your business partner.

What is an Outstanding Check?

An outstanding check represents a liability for the payor. The payor must be sure to keep enough money in the account to cover the amount of the outstanding check until it is cashed, which could take weeks or sometimes even months. Checks that are outstanding for a long period of time are known as stale checks. Although separate journal entries for each expense can be made, it is simpler to combine them, so bank fees expense is debited for $70 and cash is credited for $70. Accounts receivable can be a little fun—after all, it’s all about raking in your hard-earned dough. Accounts payable (often called A/P), on the other hand, focuses on the unpaid bills of the business—that is, the money you owe your suppliers and other creditors.

Therefore, each transaction on the bank statement should be double‐checked. If the bank incorrectly recorded a transaction, the bank must be contacted, and the bank balance must be adjusted on the bank reconciliation. If the company incorrectly recorded a transaction, the book balance must be adjusted on the bank reconciliation and a correcting entry must be journalized and posted to the general ledger. This error is a reconciling item because the company’s general ledger cash account is overstated by $63. A credit memorandum attached to the Vector Management Group’s bank statement describes the bank’s collection of a $1,500 note receivable along with $90 in interest.

Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them. Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening.

Additions to a bank statement:

Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable), monthly utility bills, or other liabilities. Automatic deposits occur when the company’s checking account receives automatic fund transfers from customers or other sources or when the bank collects notes receivable payments on behalf of the company. Bank Reconciling Items are items that caused the differences between the recorded amount of cash per the company’s books and the bank statement. This include deposit in transit, outstanding checks and book and bank errors.

Expenses from the cash disbursements journal are, at the end of each day, posted to the appropriate accounts payable ledger. The accounts payable ledger is a record of what you owe each vendor. Ensure your accounting software automatically keeps separate ledgers as well as the general ledger. With this website you will be able to check balances on accounts, issue stop payment on checks and retrieve monthly bank statements. When you mail statements to your customers every month, you should reconcile your accounts receivable ledgers with the accounts receivable control account. The control account is the total accounts receivable balance from your general ledger.

These differences are referred to as reconciling items. A bank reconciliation begins by showing the bank statement’s ending balance and the company’s balance (book balance) in the cash account on the same date. You should keep an accounts payable ledger account for each supplier.

• After preparing the bank reconciliation, you can be comfortable that the account balance shown on your books is up-to-date, and gain insight into any irregularities such as employee theft of funds.
• With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.
• A voided check is a check written or partially written but then canceled/voided or deleted by the signer of the check before being handed to the payee.
• To reconcile outstanding checks with your bank statement, compare the checks issued but not yet cleared with the information provided on the statement, ensuring that both records align.
• Writing checks makes it possible for organizations and individuals to make payments without requiring instantaneous cash or electronic transactions to be completed.
• When the bank receives the full amount requested, it deposits it into the payee’s account.

Theoretically, the transactions listed on a business’ bank statement should be identical to those that appear in the accounting records of the business, with matching ending cash balances on any given day. Interest income reported on the bank statement has usually not been accrued by the company and, therefore, must be added to the company’s book balance on the bank reconciliation. The final transaction listed on the Vector Management Group’s bank statement is for $18 in interest that has not been accrued, so this amount is added to the right side of the following bank reconciliation.

Stop Payment/Voided/Cancelled Check Records

We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? They need to be in order for the bank reconciliation to work. 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).

The more frequently you reconcile your bank statements, the easier it is each time. For the most part, how often you reconcile bank statements will depend on your volume of transactions. Forgotten outstanding checks are a common source of bank overdrafts. One way to avoid this occurrence is to maintain a balanced checkbook. This can help prevent any unnecessary NSFs if the payee decides to cash the check at a later date.

The easiest way to keep this money available is through a petty cash fund, unless, your business has cash on hand from daily transactions. A cash disbursements where does the cost of goods sold go on the income statement journal is where you record your cash (or check) paid-out transactions. It can also go by a purchases journal or an expense journal.

We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task. If a check remains outstanding for an extended period, it may become stale-dated, and the bank may refuse to honor it. The payee should contact the issuer to request a new check if this occurs. Make sure that payees have access to the right contact information so that they can get in touch with you or your designated representative regarding any questions, issues, or changes relating to the overdue check. Check to see that the contact information is correct, as checks may go missing simply because of an incorrect mailing address. Outstanding checks that remain so for a long period of time are known as stale checks.

Bank Reconciling Items

Checks that have been written and recorded in the check register but have not cleared the bank account and thus, are not on the bank statement. You have two options for recording your bank reconciliation. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed).

Checks that remain outstanding for long periods of time cannot be cashed as they become void. Some checks become stale if dated after 60 or 90 days, while others become void after six months. An outstanding check is a check payment that is written by someone but has not been cashed or deposited by the payee. The payor is the entity who writes the check, while the payee is the person or institution to whom it is written.