What Does a Bank Reconciliation Look Like?

A bank reconciliation serves as a financial tool, comparing an entity’s internal cash records with the corresponding bank statement. This process helps ensure the accuracy of financial information, providing a true picture of available cash. It aligns these two separate records, validating the cash balance.

Purpose of a Bank Reconciliation

The primary purpose of a bank reconciliation is to align the cash balance recorded in an entity’s accounting books with the balance reported by the bank. This systematic comparison helps identify and explain any discrepancies that may exist between these two sets of records. By doing so, it plays a significant role in detecting errors, such as incorrect entries or missing transactions, that might occur in either the company’s records or the bank’s system.

Regular bank reconciliations are an effective internal control measure against fraud and unauthorized transactions. They help uncover suspicious activities like unauthorized withdrawals or altered checks, which might otherwise go unnoticed. Ensuring an accurate cash balance is also important for effective cash flow management, allowing for informed financial decisions and accurate financial reporting for purposes such as tax filings.

Core Components of a Bank Reconciliation

A bank reconciliation fundamentally involves two main starting points: the cash balance according to the bank statement and the cash balance according to the entity’s own accounting records, often referred to as the “books.” The objective is to adjust both of these initial balances until they arrive at an identical, “reconciled” cash balance. This reconciled balance represents the true amount of cash available at a specific point in time.

Adjustments are made to each side to account for items that have been recorded by one party but not yet by the other, or for any errors. For the bank statement balance, additions include items the company has recorded but the bank has not, while subtractions cover items the company is aware of that the bank has not yet processed. Similarly, the company’s book balance is adjusted for transactions the bank has processed but the company has not yet recorded, or for errors in the company’s own records.

Common Adjustments Found in Reconciliations

Several specific items commonly cause differences between bank and book balances, requiring adjustments in a bank reconciliation. Deposits in transit are cash or checks that an entity has received and recorded, but the bank has not yet processed.

Outstanding checks are checks that an entity has issued and recorded as paid, but the recipient has not yet cashed or deposited them. These checks reduce the entity’s book balance immediately but do not affect the bank balance until they are presented for payment. Bank service charges are fees deducted directly from the bank account for various services. These charges reduce the bank balance but may not be recorded in the entity’s books until the bank statement is reviewed.

Interest earned on a bank account is another common adjustment. The bank adds this interest to the account balance, but the entity may not record it until they see it on the bank statement. Non-sufficient funds (NSF) checks, also known as bounced checks, occur when a customer’s check deposited by the entity is returned unpaid. The bank deducts the amount of the NSF check from the entity’s account, requiring a corresponding adjustment. Finally, errors made by either the bank or the entity in recording transactions also necessitate adjustments to reconcile the balances.

Typical Layout and Presentation

A bank reconciliation presents information in a structured format to show how the bank’s balance and the entity’s book balance are brought into agreement. A common layout is a two-column approach, with one column for the bank statement balance and the other for the company’s book balance. Each column starts with its unadjusted balance at a specific date, usually the end of the month.

Underneath the starting balances, additions and subtractions are listed, detailing the items that cause discrepancies. For instance, deposits in transit are added to the bank balance, while outstanding checks are subtracted from it. On the book side, interest earned is added, and bank service charges or NSF checks are subtracted. Clear headings and subtotals guide the reader through the adjustments. The final lines of both columns should show an identical “reconciled cash balance,” indicating all differences have been identified and accounted for. Consistent formatting, such as specific columns for dates, descriptions, and amounts, enhances readability and helps in tracking each transaction.