Two of the most common types of account reconciliation include balance sheet reconciliation and general ledger reconciliation. Account reconciliation is an essential process that can feel a lot like a puzzle. You’re matching numbers, finding discrepancies, and ensuring everything makes sense. In this article, we’ll simplify the complexities of account reconciliation to give you a clear understanding of its role in your business’s financial health. The documentation review process compares the amount of each transaction with the amount shown as incoming or outgoing in the corresponding account. For example, suppose a responsible individual retains all of their credit card receipts but notices several new charges on the credit card bill that they do not recognize.
Tick all transactions recorded in the cash book against similar transactions appearing in the bank statement. Make a list of all transactions in the bank statement that are not supported, i.e., are not supported by any evidence such as a payment receipt. For example, a company maintains a record of all the receipts for purchases made to make sure that the money incurred is going to the right avenues. When conducting a reconciliation at the end of the month, the accountant noticed that the company was charged ten times for a transaction that was not in the cash book. The accountant contacted the bank to get information on the mysterious transaction.
The reconciliation process is necessary if you use manual ledger accounting to ensure that general ledger balances are accurate. The easiest way to begin this process is to have your sub-ledgers handy along with your general ledger. The two outstanding checks will not have to be recorded as a journal entry, since the adjustment is on the bank’s side. Take my word for it, you don’t want to skip this process, even for a single month. Learn which general ledger accounts should be reconciled regularly, and key things to look for during the account reconciliation process.
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. Now, while reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book.
Check that all outgoing funds have been reflected in both your internal records and your bank account. Whether it’s checks, ATM transactions, or other charges, subtract these items from the bank statement balance. Note charges on your bank statement that you haven’t captured in your internal records. Account reconciliation is necessary for asset, liability, and equity accounts since their balances are carried forward every year. During reconciliation, you should compare the transactions recorded in an internal record-keeping account against an external monthly statement from sources such as banks and credit card companies. The balances between the two records must agree with each other, and any discrepancies should be explained in the account reconciliation statement.
Once you have access to all the necessary records, you need to reconcile, or compare, the internal trust account’s ledger to individual client ledgers. But if you’re processing a lot of transactions, it can be an eye-opening experience to review a comparative trial balance. what is the cost principle and why is it important I was excited until I realized my primary job was to reconcile five bank accounts, none of which had been reconciled for over a year. When you reconcile accounts, you compare two or more sources of a company’s accounting to check for errors and bring them into agreement.
It is important to note that it takes a few days for the bank to clear the cheques. This is especially common in cases where the cheque is deposited at a bank branch other than the one at which your account is maintained. So, this means there is a time lag between the issue of cheques and its presentation to the bank. However, there can be situations where your business has overdrafts at the bank. Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque.
Reconciling your bank statement used to involve using a checkbook ledger or a pen and paper, but modern technology—apps and accounting software—has provided easier and faster ways to get the job done. Regardless of how you do it, reconciling your bank account can be a priceless tool in your personal finance arsenal. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same. The bank balance showcased in the passbook or the bank statement must match the balance reflected in the cash book of the customer.
Single-entry bookkeeping is less complicated than double-entry and may be adequate for smaller businesses. Companies with single-entry bookkeeping systems can perform a form of reconciliation by comparing invoices, receipts, and other documentation against the entries in their books. Another way of performing a reconciliation is via the account conversion method.
It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month. These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement. If you’re working for yourself, you (or your accountant or bookkeeper) will perform bank reconciliation.
The process also applies to payables and receivables that are facilitated by third party card issuer or payment processor. It’s also important to ensure you maintain detailed records of the three-way reconciliation accounting process. There are many types of reconciliation in accounting, with the best method for a situation generally depending on the type of account that you’re looking to reconcile. I know you’d rather be selling your products or providing services to your clients than being stuck in the office doing account reconciliations. But the good news is, if they’re done on a timely basis, they become much easier. Once the trial balance looks accurate, you can rest assured your accounts have been reconciled properly.
You will need to check the bank and ledger balances to ensure that there are no short payments, deductions, disputes, and to stop credit facility for defaulting customers. Reconciliation ensures that accounting records are accurate, by detecting bookkeeping errors and fraudulent transactions. The differences may sometimes be acceptable due to the timing of payments and deposits, but any unexplained differences may point to potential theft or misuse of funds. Also, transactions appearing in the bank statement but missing in the cash book should be noted. Some of the transactions affected may include ATM service charges, check printing fees. Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank.
Similarly, if there are deposits appearing in the bank statement but are not in the cash book, add the entries to the cash book balance. The bank discovered that the mysterious transaction was a bank error, and therefore, reimbursed the company for the incorrect deductions. Rectifying the bank errors bring the bank statement balance and the cash book balance into an agreement. Reconciling an account is an accounting process that is used to ensure that the transactions in a company’s financial records are consistent with independent third party reports.