Explain the steps involved in preparing a bank reconciliation statement

You come to know about such deductions only when you receive the statement from the bank. However, there can be situations where your business has overdrafts at the bank. NSF fee for the rejected dishonored check of $10 charged by the bank. Dividends amounting to $1,335 received directly from an investment account. A bounced cheque leads to a fall in one’s reputation in the eyes of the bank.

One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts. After adjusting all the above items what you get is the adjusted balance of the cash book. Prepare a bank reconciliation statement for Company which of the following is not a step in preparing a bank reconciliation? A as of 30 September 20XX. Errors in calculation or recording of payments are more likely made by business staff than by a bank. Nevertheless, while bank errors are very rare, it is still a possibility. These items are typically service fees, overdraft fees, and interest income.

Step #5: Record All The Adjustments As Per Cash Book Into Your Company’s General Ledger Cash Account

In this article, we will discuss the bank reconciliation format and how to prepare it. A bank reconciliation is a critical tool for managing your cash balance. Reconciling is the process of comparing the cash activity in your accounting records to the transactions in your bank statement. This process helps you monitor all of the cash inflows and outflows in your bank account.

Remember that items such as outstanding checks do not need be recorded into the G/L since they are already there. However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. For instance, the bank charged your business $30 in service fees, but it also paid you $5 in interest.

HOW TO PREPARE A BANK RECONCILIATION STEP BY STEP?

When a company writes a check, the company’s general ledger Cash account is credited (and another account is debited) using the date of the check. Therefore, a check dated June 29 will be recorded in the company’s accounts using the date of June 29, even if the check clears (is paid through) the company’s bank account one week later. Drafting a bank reconciliation statement is the crux of the process since it properly identifies the transactions required to bring both balances to the same threshold. When done frequently, reconciliation statements help companies identify cash flow errors, present accurate information to investors, and plan and pay taxes correctly. They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding.

Bank reconciliation statements are effective tools for detecting fraud, theft, and loss. For example, if a check is altered, the payment made for that check will be larger than you anticipate. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money. Automation can solve the problem of time-consuming manual reconciliation and reduce errors. Cross-checking the bank statement and balance sheet can be done without human intervention using software tools.

Understanding Goodwill in Balance Sheet – Explained

Moreover, some random errors like noting wrong entries to the data, etc. might not be replaced. In this day of electronic banking, many people believe completing a bank reconciliation is no longer necessary. Bank reconciliations are an important part of a business’ internal control system. Bank reconciliations must be performed to find the differences between the bank book balance of a business and its bank statement balance. But there is no harm in double-checking the bank statements with ledgers. As you know, the balances in asset accounts are increased with a debit entry.

The end result should be a reconciliation of the two balances, with any remaining differences explained and resolved. The reconciliation of bank statements is a critical step in maintaining accurate financial records for any business. It helps to ensure that the company’s accounting records are up-to-date and accurate, which is essential for making informed business decisions.