Explain the difference between book balance and bank balance

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book balance vs bank balance

If an adjustment is entered in the Bank Reconciliation module, this adjustment must be posted to the General Ledger module, so that the two modules balance. Note that the transactions the company is aware of have already been recorded (journalized) in its records. However, the transactions that the bank is aware of but the company is not must be journalized in the entity’s records. After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again.

book balance vs bank balance

To do this, a reconciliation statement known as the bank reconciliation statement is prepared. Checks deposited, particularly on the last day of the month, may not be credited by the bank until they are collected from the drawee’s bank. Banks would obviously show only those checks on the bank statement that have bookkeeping for startups actually been presented to them and paid by them on behalf of the account holder. A bank immediately notifies the account holder if any check is returned unpaid, but such a notification may reach the account holder after the month-end, particularly if the check was returned in the last few days of the month.

Challenges Faced While Preparing Bank Reconciliation Statements

Depending on the nature of the deposit, this float period may take up to three business days. According to this viewpoint, the banking balance can be seen as the preliminary stage for reconciling the account records. Since the book balance is the gross balances of assets in the record before any checks are gone through or stores posted, the figure could conceivably precisely reflect how much cash the accounts holder needs to work with.

There are multiple differences between the bank balance and book balance. First, there are likely to be checks outstanding that were recorded in the company’s book balance, but which have not yet been presented to the bank, and so are not recorded in the bank balance. Second, the company may have incorporated a deposit in transit into its book balance, but the bank has not yet processed it, so it does not appear in the bank balance. Third, the bank may have charged the company for a variety of fees, such as interest charges, account maintenance charges, and check processing charges, which are included in the bank balance but not the book balance. Finally, the company or the bank may have erroneously recorded a transaction, which results in an unresolved difference between the two balances. Bank reconciliation is an essential tool for every account system for two primary reasons.

Quickbooks: How to Setup a Petty Cash Account

Cash balance at the bank of a company and the cash balance maintained at the company’s cash book often do not match due to a number of factors. Thus, companies are required to perform bank reconciliation that showcases the difference between the cash balance in company’s cash account and the cash balance according to its bank statement. A credit memorandum attached to the Vector Management Group’s bank statement describes the bank’s collection of a $1,500 note receivable along with $90 in interest. The bank deducted $25 for this service, so the automatic deposit was for $1,565. The bank statement also includes a debit memorandum describing a $253 automatic withdrawal for a utility payment.

  • A bank reconciliation statement can be prepared to summarize the banking activity for an accounting period to be compared to a company’s financial records and book balance.
  • You can access your current Bank Reconciliation Report from the Report Screen under Other Reports.
  • This is because changing an earlier period may impact the overall account balance so these periods may no longer be accurate.
  • The company will come to know of such charges only when they receive the bank statement.
  • They’ll be able to give you advice on how to fix this or at least an answer to why this is occurring.