How to Prepare a Bank Reconciliation Statement

Bank reconciliation matches a company’s accounting records cash balance with its bank statement. This process verifies all transactions are correctly recorded by both the business and the bank, serving as an internal control mechanism.

Understanding the Basics of Bank Reconciliation

A bank statement is a summary provided by a financial institution, detailing all transactions that have cleared a bank account over a specific period, typically a month. This statement includes deposits, withdrawals, and any bank-initiated charges or credits. A company maintains its own cash ledger, an internal record of all cash inflows and outflows, updated as transactions occur.

The balance shown on the bank statement will often not immediately match the balance in the company’s cash ledger. “Outstanding checks” are checks the company has issued and recorded in its books, but that have not yet been presented to or cleared by the bank. These checks reduce the company’s book balance, but the bank’s record remains higher until the checks are processed. Conversely, “deposits in transit” refer to cash or checks a company has received and recorded as a deposit, but which the bank has not yet processed or reflected on the bank statement. This typically happens with deposits made late in the day or close to the statement cut-off time.

Bank statements may include “debit memos,” which are notifications from the bank that an account balance has been decreased for reasons other than standard withdrawals. These can include bank service charges, fees for returned checks (NSF checks), or charges for printing new checks. Conversely, “credit memos” are notifications from the bank indicating an increase to the account balance. Common examples include interest earned on the account balance or the collection of a note receivable by the bank on the company’s behalf. These items are typically reflected on the bank statement before the company is aware of them, necessitating adjustments during reconciliation.

Identifying Common Discrepancies

Discrepancies between a company’s cash ledger and its bank statement arise for several common reasons, leading to an initial mismatch in balances. The most frequent causes are timing differences, where transactions are recorded at different moments by the company and the bank. For example, an outstanding check reduces the company’s internal cash balance immediately upon issuance, but the bank’s balance does not decrease until the check is presented for payment, which can take several days or weeks. Similarly, a deposit made by the company and recorded in its books might not appear on the bank statement until the next business day. These timing variances are a normal part of financial operations and do not indicate errors.

Bank-initiated transactions also cause discrepancies that the company may not know about until it receives the bank statement. These include service charges, monthly maintenance fees, or charges for insufficient funds (NSF) checks that the bank deducts directly from the account. Conversely, interest earned on the bank account or direct collections made by the bank on the company’s behalf increase the bank balance before the company has recorded them in its internal ledger. These items require the company to update its records based on the information provided by the bank.

Errors can also contribute to differences between the book and bank balances. Mistakes can originate from either the bank or the company’s accounting department. A bank error might involve incorrectly crediting or debiting an account, such as posting another customer’s transaction to the company’s account. Company errors can include mathematical mistakes in recording transactions, transposing numbers, or simply omitting a transaction from the cash ledger. Identifying and correcting these errors is a key outcome of the bank reconciliation process.

Step-by-Step Bank Reconciliation Process

The process begins by gathering essential documents for the reconciliation period, typically a month, including the company’s cash ledger and the corresponding bank statement. Having these two primary documents side-by-side is necessary to systematically compare transactions.

Compare all deposits listed in the company’s cash ledger with those shown on the bank statement, ticking off each matching item. Similarly, compare all checks and withdrawals recorded in the cash ledger against the debits on the bank statement, also marking off matched items. This initial comparison helps quickly identify transactions that have cleared both records.

After matching, identify and list any deposits recorded in the company’s ledger that do not appear on the bank statement; these are deposits in transit. These amounts are added to the bank statement balance because the money has been received and recorded by the company, but the bank has not yet processed it. Concurrently, identify any checks issued by the company and recorded in its books that have not yet appeared as debits on the bank statement; these are outstanding checks. These amounts are subtracted from the bank statement balance, as the bank still shows these funds available, though they are committed by the company.

Address transactions that appear on the bank statement but have not yet been recorded in the company’s cash ledger. These often include bank service charges, fees for returned checks (NSF checks), or interest earned on the account. These items necessitate adjustments to the company’s book balance. Bank service charges and NSF checks are subtracted from the book balance, while interest earned and bank collections are added.

Subsequently, any errors discovered, whether made by the bank or the company, must be addressed. If the bank made an error, such as crediting or debiting the wrong account, the company should contact the bank to have it corrected, but no adjustment is made to the company’s books. If the company made an error in recording a transaction, such as an incorrect amount or a duplicate entry, an adjustment must be made to the company’s cash ledger to correct it.

A reconciliation statement is prepared, typically with two sections: one adjusting the bank statement balance and another adjusting the company’s book balance. The adjusted bank balance is calculated by taking the bank statement ending balance, adding deposits in transit, subtracting outstanding checks, and correcting any bank errors. The adjusted book balance is calculated by taking the company’s cash ledger ending balance, adding credit memos (like interest earned), subtracting debit memos (like bank service charges and NSF checks), and correcting any company errors. The goal is for the adjusted bank balance to precisely equal the adjusted book balance, confirming the reconciliation is complete.

Finalizing and Maintaining Reconciliation

Once the bank reconciliation process is complete and the adjusted bank balance matches the adjusted book balance, the next step involves making necessary adjustments to the company’s accounting records. For any items that were added to or subtracted from the company’s book balance during the reconciliation (such as bank service charges, interest earned, or NSF checks), corresponding journal entries must be recorded in the accounting system. This ensures the company’s cash ledger accurately reflects the true cash position and aligns with the reconciled bank balance.

Regular reconciliation is a fundamental practice for maintaining accurate financial records and strong internal controls. Most businesses perform bank reconciliations monthly, aligning with the typical frequency of bank statement availability. This consistent practice allows for the timely detection and correction of errors, identification of unauthorized transactions or fraud, and improved cash flow management.

Maintaining thorough documentation for all adjustments and the completed reconciliation statement is also important. This creates a clear audit trail, supporting the accuracy of financial statements and providing a reference for future periods. Consistent reconciliation procedures contribute significantly to the reliability of a company’s financial reporting.