8 6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries Principles of Accounting, Volume 1: Financial Accounting
Should you manage both a checking and a credit card account, ensure you have statements for each. On the business end, possession of the company’s cash book is necessary, documenting all inflows and outflows of cash. Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences.
In order to prepare a bank reconciliation statement, you need to obtain the current as well as the previous month’s bank statements and the cash book. The very purpose of reconciling bank statements with your business’s cash book is to ensure that the balance as per the passbook matches the balance as per the cash book. Bank reconciliation is the process of matching the bank balances reflected in the cash book of a business with the balances reflected in the bank statement of the business in a given period. Such a process determines the differences between the balances as per the cash book and bank passbook.
Bank Reconciliation Formula
Let’s say a company’s records show that the beginning balance of the bank account is $10,000. During the month, the company received $5,000 in deposits, made $3,000 in withdrawals, and wrote $1,000 in checks that have not yet cleared the bank. The calculator then compares the two and highlights any differences.
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). When you record the reconciliation, you only record the change to the balance in bank reconciliation your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions. For example, a restaurant or a busy retail store both process a lot of transactions and take in a lot of cash.
Step #4: Make Sure That the Balance As Per Bank Matches With the Balance As Per Cash Book
Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. Automated reconciliation software solutions such as Nanonets offer a streamlined solution to the challenges posed by outstanding checks in the reconciliation process. These tools leverage advanced algorithms and data integration capabilities to automate the matching of transactions between accounting records and bank statements. A bank reconciliation statement reconciles the bank statement with the company’s accounts.
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. This formula is invaluable for comparing checks issued as recorded in your books with those listed in the bank statement. By using VLOOKUP, you can effortlessly identify outstanding checks, ensuring all issued checks are accounted for. There could be transactions unaccounted for in your personal financial records because of a bank adjustment.
