The above case presents preparing a bank reconciliation statement starting with positive bank balances. After adjusting all the above items, what you get is the adjusted balance as per the cash book. That means your account could quickly become overdrawn, with penalties and fees adding up in a matter of days. This is probably the most important step in the entire bank reconciliation process. You can do a bank reconciliation when you receive your statement at the end of the month or using your online banking data. For the most part, how often you reconcile bank statements will depend on your volume of transactions.

• Bank reconciliation done through accounting software is easier and error-free.
• This balance exists when the deposits made by your business at your bank are more than the withdrawals.
• Compare your personal transaction records to your most recent bank statement.
• Cloud accounting software like Quickbooks makes preparing a reconciliation statement easy.
• Tracking of payments can be accomplished through the use of checks, which provide both a paper trail and evidence of payment.
• The goal of bank account reconciliation is to ensure your records align with the bank’s records.

Once you’ve figured out the reasons why your bank statement and your accounting records don’t match up, you need to record them. We’ll go over each step of the bank reconciliation process in more detail, but first—are your books up to date? If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you). Add in any uncleared transactions that might not show up in your bank account yet, including uncleared checks and credit card charges that you need to pay off. Outstanding checks also provide the opportunity for payment delays, which can be advantageous when it comes to managing cash flow. Even if the checkwriter has sufficient funds, any delay from the depositor simply means higher interest revenue on the capital balance waiting to be drawn down.

In the past, it was common for a company to prepare the bank reconciliation after receiving the monthly bank statement and before issuing the company’s balance sheets. However, with today’s online banking a company can prepare a bank reconciliation throughout the month (as well as at the end of the month). This allows the company to verify its checking account balance more frequently and to make any necessary corrections much sooner. If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.

Errors Made by Your Business or your Bank

So, this means there is a time lag between the issue of cheques and its presentation to the bank. If a check remains outstanding for an extended period, it may become stale-dated, and the bank may refuse to honor it. The payee should contact the issuer to request a new check if this occurs.

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. 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.

• Banks often require customers to pay monthly account fees, check printing fees, safe‐deposit box rental fees, and other fees.
• It’s true that most accounting software applications offer bank connectivity, which can speed up the reconciliation process immensely.
• Since the NSF check has previously been recorded as a cash receipt, a journal entry is necessary to update the company’s books.
• 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.
• Outstanding checks aren’t necessarily inherently bad; however, there are some risks and downsides to have checks linger.

In case you are not using accounting software, you can use Excel to record such items. Therefore, you record no entry in the business’ cash book for the above items. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account.

How to Avoid Outstanding Checks

While accounting software apps that offer bank connectivity can expedite the reconciliation process, they should not replace performing your own monthly bank reconciliation. The deposit could have been received after the cutoff date for the monthly statement release. Depending on how you choose to receive notifications from your bank, you may receive email or text alerts for successful deposits into your account. Contact your bank to investigate further and find where the issue lies. Once solved, be sure to adjust your records to reflect deposits as needed.

Bank Reconciliation Procedure

This means that the bank balance will be greater than the company’s true amount of cash. If an outstanding check from the previous month did not clear the bank account in the current month, the check will remain on the list of outstanding checks. As a result, the bank reconciliation for the current month will again show the outstanding check amount as a subtraction from the bank statement balance. 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. As a result, the balance as per the bank statement is lower than the balance as per the cash book.

outstanding checks definition

Next, check to see if all of the deposits listed in your records are present on your bank statement. Whatever method you prefer, it’s important to keep solid records of every transaction to reconcile your bank account properly. Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books. Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates. If you’ve issued a check that remains outstanding, it’s good practice to follow up with the recipient. It ensures they received the check and provides a nudge for them to deposit it.

However, if a company voids one of its outstanding checks, the company will need to make an entry in its general ledger. The credit portion of the entry will likely be to the account that was originally debited when the check was issued. The check that was voided is also removed from the list of outstanding checks. You first need to determine the underlying reasons responsible for the mismatch between balance as per cash book and passbook. Once you have determined the reasons, you need to record such changes in your books of accounts.

Also, always maintain in communication with payees about payments not fully processed. To reconcile outstanding checks with your bank statement, compare the checks issued but not yet cleared with the information provided on the statement, ensuring that both records align. On your reconciliation sheet, outstanding checks are often subtracted from your balance per bank because these withdrawals have not yet happened but are simply a timing matter.

Any credit cards, PayPal accounts, or other accounts with business transactions should be reconciled. Once you’re done, your cash balance in temporary accounts your accounting software should match your bank balance. If it doesn’t, you’ve missed something or made an error, so go back and find it.

However, anything that affects the G/L such as unexpected deposits, interest income, or service fees will need to be recorded. Notice that the bank reconciliation form above still does not balance, even after including the outstanding checks. This means the bank has made an adjustment to your account that has not been recorded in your G/L.