What Is a Bank Reconciliation in Accounting?
Understand bank reconciliation: the crucial accounting process for aligning company cash records with bank statements to ensure financial accuracy.
A bank reconciliation compares a company’s cash balance in its financial records with the corresponding balance reported on the bank statement. This process identifies and resolves any differences, ensuring the accuracy of cash transactions and balances.
Understanding Bank Reconciliation
Bank reconciliation maintains oversight of a company’s cash position. It verifies financial data and uncovers discrepancies, such as recording errors or unauthorized activities. Regular reconciliation ensures confidence in cash figures presented in financial statements.
Two financial records are central: the company’s cash ledger (or cash book), detailing all cash receipts and disbursements, and the bank statement, listing all transactions cleared by the bank. Reconciliation brings these records into agreement.
Identifying Common Discrepancies
Differences arise between a company’s cash ledger and its bank statement due to timing or unrecorded transactions. One common timing difference involves deposits in transit. These are cash receipts recorded by the company but not yet processed or credited by the bank. This means the bank statement might not yet reflect recently made deposits.
Another frequent discrepancy comes from outstanding checks. These are checks issued and recorded by the company but not yet presented to the bank for payment by the recipient.
Bank-initiated transactions also cause differences. Bank service charges, such as monthly maintenance fees, which can range from approximately $10 to $50 per month, or transaction fees for specific activities like wire transfers, are deducted directly by the bank. These charges often appear on the bank statement before the company has recorded them in its own ledger.
Conversely, interest earned on the account balance is added by the bank and similarly requires recording by the company once identified on the statement. Non-Sufficient Funds (NSF) checks are another type of discrepancy; when a customer’s check deposited by the company bounces due to insufficient funds, the bank will debit the company’s account for the check amount and an NSF fee, which has averaged around $17 to $34. This transaction is typically rejected by the bank.
Finally, errors can occur on either side. The bank might make a mistake, such as incorrectly posting a transaction or miscalculating a balance. Similarly, a company might make its own recording errors, like transposing numbers, entering an incorrect amount, or duplicating a transaction. Identifying and correcting these errors is an important part of the reconciliation process.
Steps to Perform a Bank Reconciliation
Performing a bank reconciliation begins by gathering the necessary documents: the current bank statement and the company’s cash ledger or internal cash records for the same period. The process then involves systematically comparing the items listed on both documents.
First, compare all deposits listed on the bank statement with the deposits recorded in the company’s cash ledger. Any deposits recorded by the company but not yet appearing on the statement are identified as deposits in transit. Next, compare all checks and withdrawals. Any checks issued by the company that have not yet cleared the bank are identified as outstanding checks.
After identifying timing differences, focus on transactions initiated by the bank. Note any bank service charges, interest earned, or returned NSF checks that appear on the bank statement but have not been recorded in the company’s books. Also, review both records for any recording errors made by either the bank or the company.
Once all discrepancies are identified, adjust the bank balance by adding deposits in transit and subtracting outstanding checks. Correct any bank errors that might have occurred. Separately, adjust the company’s book balance by subtracting bank service charges and NSF checks, adding any interest earned, and correcting any company-made errors. The objective is for the adjusted bank balance to precisely match the adjusted book balance.
Upon successful reconciliation, any adjustments made to the company’s book balance require corresponding adjusting journal entries in the accounting system. These entries ensure that the company’s cash account accurately reflects the true cash position, incorporating all transactions and fees identified during the reconciliation process.