A bank reconciliation is the process of matching the balances in an entity's accounting records for a cash account with the corresponding information on a bank statement. The objective of this process is to determine the differences between the two and to record the changes in the accounting records as appropriate. The information on the bank statement is the bank's record of all transactions that affected the entity's bank account during the last month.
A bank reconciliation must be completed at regular intervals for all bank accounts, to ensure that a company's cash records are correct. Otherwise, you may find that cash balances are much lower than expected, resulting in bad checks or overdraft fees. A bank reconciliation will also detect some types of fraud after the fact; This information can be used to design better controls over the receipt and payment of cash.
If there is so little activity in a bank account that there really is no need for regular bank reconciliation platform, you have to wonder why the account exists. It may be better to cancel the account and transfer the residual funds to a more active account. By doing so, it can be easier to invest residual funds, as well as monitor the status of the investment.
At a minimum, perform a bank reconciliation shortly after the end of each month, when the bank sends the business a bank statement that contains the bank's beginning cash balance, transactions for the month, and ending cash balance. It is even better to perform a bank reconciliation service every day, based on the bank's information to date, which should be accessible on the bank's website. By completing a bank reconciliation every day, you can spot and correct problems right away. In particular, a daily reconciliation will highlight any ACH debits from the account that you did not authorize; You can then install a debit block on the account to prevent these ACH debits from being used to withdraw funds from the account without your permission.
It is extremely unlikely that a company's ending cash balance and a bank's ending cash balance will be identical, as there are likely multiple payments and deposits in transit at all times, as well as banking service fees (for accepting checks, posting deposits etc. ahead), penalties (usually for overdrafts), and insufficient funds deposits that the business has not yet recorded.
The essential process flow for a bank reconciliation tool is to start with the bank's ending cash balance, add deposits in transit from the business to the bank, subtract checks that have not yet cleared by the bank, and add or deduct any other. articles. Then, go to the company's ending cash balance and deduct any banking service charges, bad checks, and penalties from it, and add any accrued interest. At the end of this process, the adjusted bank balance should equal the company's final adjusted cash balance.
Bank Reconciliation Terminology
The key terms to keep in mind when dealing with a bank reconciliation are:
Deposit in transit. Cash and / or checks that have been received and recorded by an entity, but that have not yet been recorded in the records of the bank where the entity deposits the funds. If this occurs at the end of the month, the deposit will not appear on the bank statement and will therefore become a reconciling item in the payment reconciliation tool. A deposit in transit occurs when a deposit arrives at the bank too late for it to be posted that day, or if the entity sends the deposit to the bank (in which case a multi-day mail float may cause a delay), or the entity You have not yet sent the deposit to the bank.
Exceptional checkup. A check payment that has been posted by the issuing entity, but has not yet cleared your bank account as a deduction from cash. If you have not yet settled the bank at the end of the month, it does not appear on the month-end bank statement and is therefore a reconciling item in the month-end bank reconciliation.
NSF check. A check that was not honored by the bank of the entity issuing the check, because the entity's bank account does not contain sufficient funds. NSF is an acronym for "insufficient funds." An entity attempting to cash a check with insufficient funds may have to pay a processing fee from your bank. The entity that writes an NSF check will certainly have to pay a fee from their bank.
How Do You Reconcile a Bank Statement?
To reconcile a bank statement, the account balance as reported by the bank is compared to a company's general ledger.
Companies maintain a cash book to record both bank transactions and cash transactions. The cash column in the cash book shows the available cash, while the bank column shows the cash in the bank.
Similarly, from this source the bank also maintains an account for each customer. In bank books, deposits are recorded on the credit side, while withdrawals are recorded on the debit side. The bank sends the account statement to its clients every month or at regular intervals.
Sometimes these balances do not match. The company needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm that all items are posted and that the ending balances match.
How Often Should You Reconcile Your Bank Account?
Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of each month, weekly, and even at the end of each day by companies that have a large number of transactions.
Before the payment reconciliation service process, companies must ensure that they have recorded all transactions up to the end of their bank statement. Businesses using the online banking service can download bank statements for the regular reconciliation process instead of having to manually enter the information.