What Is a Bank Reconciliation Statement (BRS)?

A bank reconciliation statement serves as a fundamental accounting tool for businesses of all sizes. It helps ensure the accuracy of financial records by comparing a company’s cash balance with the balance reported by its bank, providing a clear picture of an entity’s true cash position.

Understanding the Bank Reconciliation Statement

A bank reconciliation statement (BRS) compares the cash balance in a company’s accounting records (cash book) with the balance shown on the bank statement. Its objective is to explain any differences, which often arise from timing or transactions recorded by one party but not yet the other.

This reconciliation process acts as an internal control mechanism. It helps businesses detect potential errors, identify fraudulent activities, and ensure their internal records accurately reflect the actual funds available in their bank account.

Common Reconciling Differences

Several types of transactions commonly cause discrepancies between a company’s cash book balance and its bank statement balance. These differences are typically due to timing lags or items recorded by one party but not yet the other.

Deposits in transit represent cash and checks a company has recorded but the bank has not yet processed. This often occurs when deposits are made late in the day or after the bank’s cutoff time.

Outstanding checks are payments issued by the company and recorded in its general ledger, but which have not yet been presented to or cleared by the bank. These checks will not appear on the bank statement until they clear.

Bank service charges are fees banks deduct directly from an account for various services. These charges reduce the bank balance immediately but may not be recorded in the company’s books until the bank statement is reviewed.

Interest earned refers to income credited by the bank on the account balance. This interest increases the bank balance but is usually not recorded in the company’s accounting records until the bank statement is received.

Non-Sufficient Funds (NSF) checks occur when a check received and deposited by the company is returned by the bank because the payer’s account lacks sufficient funds. The bank will deduct the amount of the NSF check from the company’s account, and often charge an additional fee.

Errors can also cause discrepancies, originating from either the bank or the company. Company errors include incorrect recording of transaction amounts or accidental duplicate entries. Bank errors might involve incorrect debits or credits to an account.

Steps to Prepare a Bank Reconciliation

Preparing a bank reconciliation involves a systematic approach to compare and adjust the two cash balances. The process begins by gathering the company’s cash ledger (or cash book) and the most recent bank statement.

Next, compare deposits in the company’s records with those on the bank statement. Any deposits recorded by the company but not yet by the bank are identified as deposits in transit. Similarly, compare all checks and other payments recorded in the cash book against cleared transactions on the bank statement.

Identify any checks issued by the company but not yet cleared by the bank as outstanding checks. Then, identify items that appear on the bank statement but are not yet in the company’s records. This includes bank service charges, interest earned, and any direct debits or credits made by the bank.

Finally, note any errors made by either the bank or the company. After identifying all reconciling items, a formal reconciliation statement is constructed. This statement adjusts both the bank balance and the company’s cash book balance to arrive at a single, reconciled cash balance.

Recording Post-Reconciliation Adjustments

After completing the bank reconciliation process, a crucial step involves making necessary adjustments to the company’s accounting records. Only items that affect the company’s cash book balance require journal entries to update the general ledger. Items such as deposits in transit and outstanding checks do not require company journal entries because the company’s records for these transactions are already accurate; the bank’s records simply need time to catch up.

For bank service charges, a journal entry would typically debit a “Bank Service Charges Expense” account and credit the “Cash” account to reflect the fee deducted by the bank. When interest is earned on the bank account, the company would debit “Cash” and credit an “Interest Income” or “Interest Revenue” account. If an NSF check was returned, the company would debit “Accounts Receivable” (reinstating the amount owed by the customer) and credit “Cash,” as the funds were removed from the account.

Errors discovered in the company’s books also necessitate correcting journal entries to adjust the relevant accounts. This ensures that the cash account in the company’s general ledger accurately reflects the true, reconciled cash balance, providing a reliable foundation for financial reporting.