How to Perform a Statement Reconciliation
Understand the principles of statement reconciliation to confirm the accuracy of your financial records and gain a clearer view of your true cash position.
Statement reconciliation is the process of comparing internal financial records against those of a financial institution, such as a bank or credit card company. Its purpose is to verify that the cash balance recorded by a business or individual matches the balance reported by the bank. By regularly performing this check, one can ensure that all transactions have been correctly recorded.
Required Information and Documents
Before beginning the reconciliation, it is necessary to gather specific financial documents. The two primary items needed are the bank or credit card statement for the period in question and the corresponding internal cash records. From both the bank statement and the internal records, you will need to identify the beginning and ending balances for the period, as well as a detailed list of every transaction.
A key part of preparation involves understanding items that commonly cause differences between the two sets of records. Deposits in transit are payments recorded in the company’s books but not yet processed and credited by the bank. Conversely, outstanding checks are checks that the company has issued and recorded, but which have not yet been presented to or paid by the bank.
Other items originate on the bank statement and may not yet be in the internal records. These include bank service charges, which are fees for account maintenance or specific transactions that the bank deducts directly from the account. Interest earned is another such item, representing money the bank pays on the account balance.
The Reconciliation Process
The reconciliation process starts by methodically comparing the transactions on the bank statement to those in the internal cash records. Begin with the deposits, matching each deposit listed on the bank statement to the corresponding entry in the company’s cash book. This systematic check helps isolate any deposits recorded internally but not yet shown by the bank.
Next, perform the same comparison for all withdrawals, including checks, debit card payments, and electronic transfers. Each withdrawal on the bank statement should be matched against an entry in the internal records. Any checks or payments recorded in the company’s books that do not appear on the bank statement are identified as outstanding.
With the matching complete, the next action is to prepare a reconciliation summary, which involves two separate calculations. First, calculate the adjusted bank balance by taking the ending balance from the bank statement, adding any deposits in transit, and subtracting all outstanding checks.
Simultaneously, you calculate the adjusted book balance. This starts with the ending cash balance from the company’s internal records. To this figure, you subtract any bank service fees or other bank charges and add any interest earned that was identified on the bank statement but not yet recorded in the books.
The final step is to compare the adjusted bank balance with the adjusted book balance. If the two totals are equal, the account is considered reconciled. A successful match indicates that the company’s cash records are accurate as of the statement date.
Resolving Discrepancies and Finalizing
Once the adjusted bank and book balances match, the final step is to record adjusting journal entries in the company’s accounting system. For example, a bank service charge of $15 would be recorded by debiting a “Bank Service Charge Expense” account and crediting the “Cash” account for that amount. Similarly, if $10 in interest was earned, the entry would be a debit to “Cash” and a credit to an “Interest Revenue” account.
If the reconciliation process does not result in matching adjusted balances, an investigation is required to find the source of the discrepancy. The issue is often a simple error, such as a transposition of numbers when a check was recorded or a deposit that was entered for the wrong amount in the internal ledger. It could also be an omission, where a transaction was missed entirely from the company’s books.
The investigation involves re-examining the bank statement and internal records to locate the error. Once the error is found, a correcting entry must be made in the company’s records to fix the mistake, after which the reconciliation should be attempted again. This finalizes the process and ensures the integrity of the financial records.