How to Perform a Bank Reconciliation Statement

What a Bank Reconciliation Involves

A bank reconciliation is a detailed comparison between a company’s cash balance in its internal accounting records and the cash balance reported on the bank statement. This process identifies and explains any discrepancies that exist between these two balances at a specific point in time, ensuring the accuracy of financial records.

Several common items account for the variances observed during a reconciliation. Deposits in transit represent cash or checks received and recorded by the company but not yet processed and posted by the bank. Conversely, outstanding checks are payments issued by the company and recorded in its books, but which have not yet been presented to the bank for payment.

Other discrepancies arise from transactions the bank processes without immediate notification to the company. Bank service charges are fees deducted directly by the bank for various services, which the company may not have recorded yet. Similarly, interest earned on account balances is credited by the bank. Non-Sufficient Funds (NSF) checks occur when a customer’s check deposited by the company is returned due to insufficient funds.

Errors can also cause disparities. A bank error could involve incorrect deposits or withdrawals posted to the account. Company errors might include mistakes made when recording transactions in the company’s cash ledger, such as incorrect amounts or duplicate entries.

Gathering Your Financial Records

Before initiating the bank reconciliation process, compile all relevant financial documents for the specific period under review. The most recent bank statement is a primary document, providing the bank’s official record of all transactions and the ending balance for the account.

The company’s internal accounting records are equally important for comparison. This includes the cash ledger, which details all cash inflows and outflows, reflecting the company’s recorded cash balance. The cash receipts journal lists all monies received, while the cash disbursements journal records all payments made.

The bank reconciliation statement from the immediately preceding month is also essential. This prior reconciliation details any outstanding items, such as deposits in transit or checks that had not cleared, which may still be pending clearance on the current bank statement. Utilizing accounting software can streamline the retrieval of these internal records.

The Reconciliation Process

The reconciliation process begins by comparing the ending cash balance reported on the bank statement with the ending cash balance recorded in the company’s general ledger for the same period. The objective is to systematically adjust both balances until they agree, revealing the true, accurate cash position.

First, compare all deposits listed in the company’s cash receipts journal with the deposits shown on the bank statement. Any deposit recorded by the company but not yet appearing on the bank statement is identified as a “deposit in transit” and is added to the bank statement balance.

Next, compare all checks and other payments recorded in the company’s cash disbursements journal against the withdrawals listed on the bank statement. Checks issued by the company but not yet cleared by the bank are identified as “outstanding checks” and are subtracted from the bank statement balance.

The bank statement is then reviewed for transactions that the company may not have recorded internally. These include bank service charges, which are deducted from the bank balance and subtracted from the company’s book balance. Similarly, any interest earned on the account, credited by the bank, needs to be added to the company’s book balance.

Any errors discovered during the comparison must also be addressed. If the bank made an error, such as crediting another customer’s deposit to the company’s account, an adjustment would be made to the bank balance. If the company made an error, like recording a payment for an incorrect amount, the company’s book balance would be adjusted accordingly. After all identified discrepancies are listed and applied, the adjusted bank balance should precisely match the adjusted book balance.

Troubleshooting and Recording Adjustments

If, after applying all identified adjustments, the adjusted bank balance does not equal the adjusted book balance, further investigation is required. Common sources of such imbalances include mathematical errors made during the reconciliation calculations, or transposition errors where digits were swapped (e.g., $54 instead of $45). Unrecorded transactions or missing entries can also prevent the balances from aligning.

A systematic approach to troubleshooting involves re-checking all calculations performed on the reconciliation statement. It is also prudent to verify the opening balances used from both the bank statement and the company’s ledger against the prior period’s closing balances. Reviewing each individual entry for correct amounts and ensuring no transactions were inadvertently omitted or duplicated can help pinpoint the discrepancy.

Once the bank reconciliation is complete and the adjusted bank balance precisely matches the adjusted book balance, any adjustments made to the company’s book balance must be formally recorded in the company’s accounting system. This involves creating journal entries to update the cash account in the general ledger. For instance, interest earned from the bank would necessitate a debit to Cash and a credit to Interest Revenue.

Conversely, bank service charges would require a debit to Bank Service Charge Expense and a credit to Cash. If an NSF check was returned, an entry would typically involve debiting Accounts Receivable and crediting Cash. Adjustments made to the bank balance, such as deposits in transit or outstanding checks, do not require corresponding journal entries in the company’s books, as these items are already correctly recorded by the company and are awaiting bank processing.