How to Prepare a Bank Reconciliation Statement

A bank reconciliation statement compares the cash balance in a company’s accounting records with the balance reported by the bank. This process ensures both sets of records accurately reflect the true amount of cash available. Its purpose is to identify discrepancies, which can arise from various factors. By performing this reconciliation, businesses and individuals can detect accounting errors, uncover fraud, or identify transactions recorded by one party but not yet the other. This regular review helps maintain precise financial information and supports sound financial management.

Essential Documents and Information

Two primary documents are necessary for reconciling cash balances: the bank statement and the company’s internal cash account ledger. The bank statement, provided by the financial institution, offers a summary of all activity within a bank account over a defined period, typically a month. This document details deposits made, checks cleared, electronic withdrawals, service charges, interest earned, and both the beginning and ending cash balances. It provides an external record of cash movements.

The second document is the company’s internal cash account ledger, often called a cash book. This record reflects all cash inflows and outflows as recorded by the business. It includes entries from cash receipts journals for money received and cash disbursements journals for payments made. Having current and accurate versions of both is important for a thorough and effective reconciliation process.

Common Discrepancies to Identify

Differences between the bank statement balance and the company’s cash balance frequently arise due to timing or errors. One common timing difference involves deposits in transit, which are cash or checks the company has received and recorded, but the bank has not yet processed. For instance, a deposit made late in the day or on a weekend might appear in the company’s records on one date but on the bank statement several business days later. Similarly, outstanding checks are those issued and recorded by the company but have not yet been presented to and cleared by the bank. A check written to a vendor, for example, might take several days or even weeks for the vendor to deposit and for the bank to process.

Banks often levy various charges that the company may not have recorded immediately. Bank service charges, such as monthly maintenance fees, are automatically deducted by the bank, and the company only becomes aware of them upon reviewing the bank statement. Conversely, interest earned on the bank account balance is credited by the bank and may not be recorded in the company’s books until the bank statement is received.

Non-Sufficient Funds (NSF) checks, also known as bounced checks, represent another common discrepancy. These occur when a check deposited by the company is returned by the payer’s bank due to inadequate funds in the payer’s account, leading to a deduction by the bank from the company’s account. The company might not know about an NSF check until it reviews the bank statement.

Errors made by either the bank or the company also contribute to discrepancies. Bank errors could include incorrect deposit postings, erroneous charges, or misapplied payments. For example, a bank might accidentally credit a deposit to the wrong account or mistakenly deduct funds. Company errors involve mistakes in the company’s own records, such as recording an incorrect amount for a transaction, overlooking a deposit, or duplicating an entry. Identifying these specific items is a foundational step in reconciling the two balances.

Adjusting the Bank Statement Balance

Once all discrepancies have been identified, the next step involves systematically adjusting the balance presented on the bank statement to arrive at the true cash balance. This process begins with the ending cash balance as reported by the bank. To this figure, any deposits in transit that have been recorded by the company but not yet by the bank are added.

Following this, any outstanding checks that the company has issued and recorded, but which have not yet cleared the bank, are subtracted from the bank balance. Finally, any bank errors that either overstated or understated the bank’s reported balance must be corrected. The result of these adjustments is the adjusted bank balance, representing the actual cash available according to the bank’s perspective, after accounting for timing differences and bank mistakes.

Adjusting the Company’s Cash Balance

The next phase of the reconciliation process focuses on adjusting the cash balance as recorded in the company’s internal ledger. This adjustment begins with the ending cash balance from the company’s books. Interest earned on the bank account, which the bank has credited but the company has not yet recorded, is added to this balance.

Conversely, bank service charges that the bank has deducted but the company has not yet accounted for must be subtracted from the company’s cash balance. This includes monthly maintenance fees or transaction fees. Similarly, any NSF checks that were previously deposited by the company but later returned by the bank are deducted from the company’s ledger balance. This reflects the reduction in cash due to the failed deposit. Finally, any errors made in the company’s own records are corrected. The result of these adjustments yields the adjusted company cash balance, which should now match the adjusted bank balance, confirming the accuracy of the cash records.

Journalizing Post-Reconciliation Adjustments

After the bank statement balance and the company’s cash balance have been successfully reconciled to a matching true cash balance, the final step involves recording the necessary adjustments in the company’s accounting system. This ensures that the company’s internal cash account precisely reflects the actual, reconciled cash balance. Importantly, only those items that were used to adjust the company’s cash balance require formal adjusting journal entries. These are transactions the company was unaware of until receiving the bank statement.

To account for interest earned, the company would debit the Cash account and credit an Interest Revenue account. For bank service charges, the company would debit a Bank Service Charge Expense account and credit the Cash account. When an NSF check is identified, the company would debit Accounts Receivable and credit the Cash account. These journal entries are critical for maintaining accurate financial records and ensuring that the company’s balance sheet presents the correct cash position.