Try FreshBooks for free to streamline your tax preparation and bank reconciliations today. The cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement. In these cases, journal entries record any adjustment to the book’s balance. After fee and interest adjustments accrued rent journal entry are made, the book balance should equal the ending balance of the bank account.

To detect fraud

In accounting, a company’s cash includes the money in its checking account(s). To safeguard this critical and tempting asset, a company should establish internal controls over its cash. Designed to keep your bank and your G/L in balance, the bank reconciliation process also helps you correct possible errors, account for uncashed checks, and even locate missing deposits. When all these adjustments have been made to the books of accounts, the balance as per the cash book must match that of the passbook. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook.

1. Such errors are committed while recording the transactions in the cash book, so the balance as per the cash book will differ from the passbook.
2. Outstanding checks are those that have been written and recorded in the financial records of the business but have not yet cleared the bank account.
3. In huge companies with full-time accountants, there’s always someone checking to make sure every number checks out, and that the books match reality.
4. However, the depositor/customer/company credits its Cash account to decrease its checking account balance.

Improves Fraud and Error Detection

With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have. We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task. Matching the payment to an invoice can be challenging if the payments are ongoing, so it’s important to reference payments to an invoice number so you can easily identify a double payment. Due to the overwhelming paperwork that the financial department deals with, it’s possible that some invoices get misplaced or are never recorded. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.

The purpose of the bank reconciliation is to be certain that the company’s general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank’s records. Completing a bank reconciliation entails matching the balances on your bank statement with the corresponding entries in your accounting records. The process can help you correct errors, locate missing funds, and identify fraudulent activity. Reconciling bank statements with cash book balances helps your business know the underlying causes of these balance differences.

If you have access to online banking, you can download the bank statements when conducting a bank reconciliation at regular intervals rather than manually entering the information. Interest is automatically deposited into a bank account after a certain period of time. So the company’s accountant prepares an entry increasing the cash currently shown in the financial records.

Adjusting Journal Entries

In order to prepare a bank reconciliation statement, you’ll need to obtain both the current and the previous month’s bank statements as well as the cash book. To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly. 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.

It’s possible that a banking error has occurred or that you have been charged for something you were unaware of. If the charges are not from your bank, the bank can also search for practice listings help you identify the source so that you can prevent any fraud or theft risk. Maintaining accurate financial records makes it easier to organize your taxes when it comes time to file.

Regular bank reconciliation double-checks that all payments have been accurately processed. This includes payments by customers to your company and payments from your company to employees, contractors, and other goods and services providers. Greg adds the $11,500 of deposits in transit to his bank statement balance, bringing him to $99,500. He also subtracts the $500 in bank fees from his financial statement balance, bringing him to $99,500 and balancing the two accounts. Compare your personal transaction records to your most recent bank statement. First, make sure that all of the deposits listed on your bank statement are recorded in your personal record.