Bookkeeping

How to Do a Bank Reconciliation: Step-By-Step Process

book balance vs bank balance

Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix. Rutherford Inc. has  a difference in the balance as on 31st March 2021 between the bank statement and cash book.

  • One reason for this is that your bank may have service charges or bank fees for things like too many withdrawals or overdrafts.
  • When you prepare your reconciliation, you adjust the balance from one source by those reconciling items to arrive at the balance of the other source.
  • The normal differences identified in a bank reconciliation will be discussed separately.
  • In other words, the book balance represents a running tally of a company’s account balance when considering all transactions, some of which have yet to be reconciled through the bank account.
  • The previous entries are standard to ensure that the bank records are matching to the financial records.

Those debits would not be recorded in the book balance until the month-end numbers are reconciled with the bank. For example, if a company wrote out several checks, those amounts would be reflected in the book balance, and at the end of the accounting period, they would be reconciled with the cash balance in the bank account. During the bank reconciliation process, you note that your general ledger shows a month-end balance is $6,000 while the bank records show a balance of $6,010 because the bank paid you $10 of interest during the month. You prepare a bank reconciliation statement by comparing the account balance recorded in your general ledger to the amount shown on the bank statement. You only need to reconcile bank statements if you use the accrual method of accounting. This is to confirm that all uncleared bank transactions you recorded actually went through.

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In addition to detecting fraud, cash book and bank reconciliation statements allow you to quickly identify any potential disruptions in your cash flow. I just ran into this same issue and realized it is actually something simple and not so complicated. If the register balance on your bank reconciliation does not match the value on your balance sheet it is likely the cleared transaction from the next month. An example law firm bookkeeping in my situation was we mailed out checks for bills that were due October 1st, those checks cleared our bank account in September so they are included in the bank reconciliation but not included on the balance sheet. When it comes to pending deposits, it is usually not a good idea to add that amount to the book balance in order to determine how much of the account balance can be withdrawn or otherwise used.

The bank reconciliation is an internal document prepared by the company that owns the checking account. Since the book balance is the gross balance of funds in the account before any checks are cleared or deposits posted, the figure may or may not accurately reflect how much money the account holder has to work with. In order to arrive at that figure, it is necessary to deduct any outstanding checks or other debits from that balance. Sometimes referred to as a net balance, this figure represents what is left after pending debits have cleared.

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If a check included in a deposit had insufficient funds, the bank would withdraw that money out of the company’s checking account. After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash https://www.digitalconnectmag.com/a-deep-dive-into-law-firm-bookkeeping/ balances for each month. This statement is used by auditors to perform the company’s year-end auditing. 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 bank deducted $25 for this service, so the automatic deposit was for $1,565. The bank statement also includes a debit memorandum describing a $253 automatic withdrawal for a utility payment. On the bank reconciliation, add unrecorded automatic deposits to the company’s book balance, and subtract unrecorded automatic withdrawals. Because reconciling items that affect the book balance on a bank reconciliation have not been recorded in the company’s books, they must be journalized and posted to the general ledger accounts. The $1,565 credit memorandum requires a compound journal entry involving four accounts.

What is the Book Balance?

The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. This makes the bank reconciliation process efficient and controllable. The previous entries are standard to ensure that the bank records are matching to the financial records. These entries are necessary to update Feeter‛s general ledger cash account to reflect the adjustments made by the bank.

book balance vs bank balance

Instead, record them on the bank reconciliation, as these are timing differences that should be reversed during next month’s reconciliation. A check that a company mails to a creditor may take several days to pass through the mail, be processed and deposited by the creditor, and then clear the banking system. Therefore, company records may include a number of checks that do not appear on the bank statement. These checks are called outstanding checks and cause the bank statement balance to overstate the company’s actual cash balance. Since outstanding checks have already been recorded in the company’s books as cash disbursements, they must be subtracted from the bank statement balance. The balance on June 30 in the company’s general ledger account entitled Checking Account is the book balance that pertains to the bank account being reconciled.

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