How to Prepare a Bank Reconciliation Statement

A bank reconciliation statement compares a company’s internal cash records with its bank statement. This process ensures the cash balance in the company’s books accurately aligns with the balance held at the bank. The primary purpose of regular bank reconciliations is to maintain financial accuracy, detect potential fraud, and manage cash flow.

Businesses typically reconcile their bank accounts monthly, or more often for high-volume operations, soon after receiving bank statements. This practice helps identify and correct errors from either the company’s records or the bank’s processing. Ensuring cash balance integrity is fundamental for reliable financial reporting and sound financial decision-making.

Gathering Essential Information

Before initiating the bank reconciliation process, gather specific financial documents. The two primary sources are the company’s internal cash ledger and the official bank statement for the relevant period. These documents provide distinct perspectives on the company’s cash activities.

The company’s cash ledger, often maintained through accounting software or a manual cash book, details all cash inflows and outflows. This includes the beginning cash balance, deposits made, and all checks or electronic payments issued. It represents the company’s record of its cash position.

The bank statement, typically provided monthly, complements the cash ledger. It outlines all transactions processed by the bank, including beginning and ending account balances, deposits, withdrawals, cleared checks, bank charges, and interest earned. Comparing these records allows for the identification of discrepancies.

Identifying Common Discrepancies

Discrepancies frequently arise between a company’s cash ledger and its bank statement due to timing differences or errors. Understanding these common items is fundamental before reconciling balances. These differences explain why the cash balance in company records rarely matches the bank’s reported balance.

One common timing difference involves “deposits in transit,” which are amounts the company has recorded but the bank has not yet processed. Conversely, “outstanding checks” refer to checks the company has issued but which have not yet cleared the bank. These items are in the company’s books but not yet on the bank statement.

The bank statement often includes transactions the company may not have recorded yet. Examples include “bank service charges,” which are fees deducted by the bank. Similarly, “interest earned” might be credited by the bank without prior notification to the company.

Another significant discrepancy involves “NSF (Non-Sufficient Funds) checks,” also known as bounced checks. These occur when a customer’s check deposited by the company is returned because the customer’s account lacks sufficient funds. The bank typically deducts this amount, along with a fee, from the company’s account. Lastly, errors can occur, such as incorrect amounts or omissions by either the company or the bank.

Performing the Reconciliation Process

The process of reconciling involves systematically comparing the company’s cash ledger entries with the bank statement to pinpoint discrepancies. This comparison aims to bring both the company’s book balance and the bank’s balance into agreement. It requires careful attention to detail for each transaction.

Begin the reconciliation by noting the ending cash balances from both the company’s cash ledger and the bank statement. Next, compare each deposit recorded in the company’s books against the deposits listed on the bank statement. Mark off matching items, then identify any deposits recorded by the company but not yet by the bank; these are deposits in transit.

Proceed to compare each check or payment issued by the company with the withdrawals and cleared checks on the bank statement. Tick off all matching transactions. Any checks issued by the company but not yet cleared by the bank are outstanding checks. This systematic matching helps isolate differences.

After comparing deposits and checks, identify any transactions on the bank statement not in the company’s cash ledger. These typically include bank service charges, interest earned, or NSF checks. Simultaneously, review the company’s records for any errors in recording transactions, such as incorrect amounts or omitted entries.

Finally, construct a reconciliation statement. Start with the bank statement balance and add deposits in transit, then subtract outstanding checks and correct any bank errors to arrive at an adjusted bank balance. Separately, start with the company’s cash ledger balance and add interest earned, deduct bank service charges, NSF checks, and correct any company errors to calculate an adjusted book balance. The goal is for these two adjusted balances to match, confirming the accuracy of the cash figure.

Recording Adjustments

After completing the bank reconciliation process and ensuring the adjusted bank balance matches the adjusted book balance, the next step is to formally update the company’s financial records. This involves making specific journal entries for discrepancies that affect the company’s cash balance. Only items identified on the bank statement not yet in company records, or errors made by the company, necessitate these adjustments.

Items like outstanding checks or deposits in transit, which represent timing differences, do not require immediate journal entries. These will naturally clear with the bank. The focus of these entries is to bring the company’s cash account into alignment with the true, reconciled cash position.

For instance, to record bank service charges, which decrease the company’s cash, a journal entry would debit “Bank Charges Expense” and credit “Cash.” If the bank statement shows interest earned, which increases cash, the entry would debit “Cash” and credit “Interest Revenue.”

When an NSF check is returned, the company must reverse the original cash receipt. This involves debiting “Accounts Receivable” to reinstate the amount owed by the customer and crediting “Cash.” Any errors discovered in the company’s own recording of transactions, such as an incorrect amount posted, require a correcting journal entry. Completing these journal entries ensures the cash balance in the company’s general ledger accurately reflects the true amount of cash available, providing a reliable foundation for financial reporting.