How to Prepare a Bank Reconciliation Statement

A bank reconciliation statement compares a company’s cash balance in its accounting records with the balance reported by the bank. This comparison helps ensure accuracy of cash transactions and the reported cash balance on financial statements. It also identifies discrepancies, which can range from simple timing differences to more serious errors or even fraudulent activities. Regularly performing this procedure provides a reliable picture of the actual cash available to the business.

Gathering Reconciliation Information

Before initiating the bank reconciliation process, gathering specific documents is necessary. The bank statement is the most fundamental document, providing the bank’s official record of all transactions for a specific period, typically a month. It details deposits, withdrawals, checks cleared, and any bank-initiated charges or credits.

Concurrently, the company’s internal accounting records, such as the cash ledger or general ledger cash account, are essential. These records reflect all cash inflows and outflows as recorded by the business, including checks issued and deposits made. Comparing these internal records against the bank’s statement allows for the identification of any differences.

Access to the prior period’s bank reconciliation statement is also beneficial. This document helps identify any outstanding items from the previous month that may have cleared the bank in the current period. Furthermore, supporting source documents like deposit slips and check stubs provide granular detail for individual transactions. These documents help verify accuracy when investigating a discrepancy.

Identifying Common Discrepancies

Discrepancies frequently arise between a company’s cash records and the bank’s statement, primarily due to timing differences or errors. One common timing difference involves deposits in transit, which are cash receipts recorded by the company but not yet processed by the bank by the statement date. For example, a deposit made late on the last day of the month might appear in the company’s books for that month but only show on the bank statement in the following month.

Similarly, outstanding checks represent another typical timing difference. These are checks the company has written and recorded as payments, but which have not yet cleared the bank. Until the payee deposits the check and the bank processes it, the check amount will be deducted from the company’s cash balance but will still be part of the bank’s reported balance.

Bank service charges, such as monthly maintenance fees, are often recorded by the bank automatically. The company learns about these charges when the bank statement is received, leading to a temporary discrepancy. Conversely, interest earned on an account is a credit posted by the bank that the company may not have recorded until the statement arrives.

Non-sufficient funds (NSF) checks, also known as bounced checks, occur when a customer’s check deposited by the company is returned because the customer’s account lacks sufficient funds. The bank credits the company’s account for the deposit, then debits it back when the check bounces, often assessing a fee. Both bank errors, such as incorrect debits, and errors made by the company in its own records, like misstated amounts, also contribute to discrepancies.

Performing the Reconciliation

Performing a bank reconciliation involves systematically adjusting both the bank balance and the company’s book balance to arrive at a true, reconciled cash balance. The process begins by taking the ending cash balance reported on the bank statement. To this bank balance, any deposits in transit are added. For instance, a $500 deposit made on the last day of the month would be added to the bank statement balance.

Conversely, all outstanding checks are subtracted from the bank statement balance. These are payments the company has made and recorded, but which have not yet been presented to the bank for payment. If five checks totaling $1,200 are outstanding, this amount would be deducted from the bank’s balance. Any errors made by the bank, such as an incorrect debit, would also be adjusted on this side.

The second part of the reconciliation focuses on adjusting the company’s own cash account balance. This process starts with the ending cash balance recorded in the company’s general ledger. Interest earned on the account is added to the book balance. For example, if the bank statement shows $15 in interest earned, this amount increases the company’s cash balance.

Bank service charges are subtracted from the book balance. A $25 monthly service fee would decrease the company’s cash balance. Similarly, non-sufficient funds (NSF) checks must be subtracted from the book balance, along with any associated bank fees. Finally, any errors made by the company in its own records, such as recording a check for the wrong amount, are corrected on this side. The ultimate goal is for the adjusted bank balance to precisely match the adjusted book balance.

Recording Book Adjustments

Upon completing the bank reconciliation and identifying all discrepancies, it is necessary to record journal entries for any items that affect the company’s cash account balance but have not yet been reflected in the books. These adjustments are exclusively for items that the company was unaware of until receiving the bank statement. For instance, bank service charges reduce the cash balance and require a debit to an expense account and a credit to the Cash account.

Conversely, interest earned on the account increases the cash balance and necessitates a debit to the Cash account and a credit to an Interest Revenue account. Non-sufficient funds (NSF) checks also require an adjustment; the original deposit must be reversed by crediting the Cash account and debiting Accounts Receivable. Any errors discovered in the company’s own records, such as an incorrect check amount, also require corrective journal entries to adjust the Cash account and the corresponding expense or asset account.

Items already known and recorded by the company, such as deposits in transit or outstanding checks, do not require journal entries. These items are timing differences that affect the bank’s records, not the company’s. Similarly, errors made by the bank do not require company journal entries; the company would typically contact the bank to have the error corrected on the bank’s end.