Bank Reconciliation: Purpose, Example, and Process

Nowadays, all deposits and withdrawals undertaken by a customer are recorded by both the bank and the customer. The bank records all transactions in a bank statement, also known as passbook, while the customer records all their bank transactions in a cash book.

The balance recorded in the passbook or the bank statement must match the balance reflected in the customer's cash book. It is up to you, the customer, to reconcile the cash book with the bank statement and report any errors to the bank.

In this article, you will learn about Bank Reconciliation, the Bank Reconciliation Procedure, the Purpose of Bank Reconciliation, and an example of Bank Reconciliation.

What is Bank Reconciliation?

A bank reconciliation is the process of matching the bank balances reflected in a business' cash book with the balances reflected in the business' bank statement in a given period in order to determine the differences between balances.

Reconciling bank statements with cash book balances helps your business know the underlying causes of these balance differences. Once the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can then make the necessary corrections in your books to ensure accuracy.

The bank reconciliation process should be carried out at regular intervals, across all your bank accounts, because running a reconciliation at regular intervals ensures that your business’ records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than expected, which may result in bounced checks or overdraft fees.

In addition to this, the reconciliation process also helps keep track the occurrence of fraud, which can help you control your business' cash receipts and payments.

Bank Reconciliation Terminology

Deposits in Transit

Deposits in transit, or outstanding deposits, are not showcased in the bank statement on the reconciliation date. This is due to the time delay that occurs between the depositing of cash or a check and the crediting of it into your account.

Your business will record the increase in bank balance in its books of accounts the moment it deposits cash or check into its bank account, meaning that the balance as per the cash book is greater than the balance as per the passbook until the time the bank processes the deposit.

These outstanding deposits must be deducted from the balance, as per the cash book, in the bank reconciliation statement.

Bank Service Charge

A bank will charge various fees in order to maintain your account with the bank. Outside of the maintenance fees, a bank may also charge fees that relate to other specific transactions. These fees may include:

• Check clearing charges
• Charges for fund transfer
• Collection charges

These fees are charged to your account directly, and reduce the reflected bank balance in your bank statement. These charges won't be recorded by your business until your bank provides you with the bank statement at the end of every month.

As a result, the bank statement balance will be lower than the cash book balance, so the difference will need to be adjusted in your cash book before preparing the bank reconciliation statement.

Not-Sufficient Funds Checks

Not-sufficient funds (NSF) refers to a situation when your bank does not honour a check, because the current account, on which the check is drawn, has insufficient funds.

In addition to this, the NSF may also occur when an individual intends to purchase with a credit card but is unable to do so due to insufficient funds in the associated bank account.

NSF checks are an item to be reconciled when preparing the bank reconciliation statement, because when you deposit a check, often it has already been cleared by the bank. But this is not the case as the bank does not clear an NFS check, and as a result, the cash on hand balance gets reduced.

Outstanding Checks

An outstanding check refers to a check payment that has been recorded in the books of accounts of the issuing company, but has not yet been cleared by the bank as a deduction from the company’s cash balance.

This means that the company's bank balance is greater than the balance reflected in the cash book.

Bank Reconciliation Procedure

Before starting to reconcile the cash book balance with the passbook balance it is important to note that ‘debit balance as per cash book’ is the same as ‘credit balance as per passbook’, meaning the deposits made by the company into a bank are higher than withdrawals.

Likewise, ‘credit balance as per cash book' is the same as ‘debit balance as per passbook’ means the withdrawals made by a company from a bank account exceed deposits made.

You can start reconciling your cash book balance with the passbook balance from any of the four balances:

• Debit balance as per cash book
• Credit balance as per cash book
• Debit balance as per passbook
• Credit balance as per passbook

There are two ways in which you can undertake bank reconciliation once you identify the reasons for the difference:

• Preparation of the bank reconciliation statement without adjusting the cash book balance
• Start with unadjusted balance as per cash book

If you want to prepare a bank reconciliation statement using either of these approaches, you can use the balance as per the cash book or balance as per the passbook as your starting point.

The debit balance as per the cash book refers to the deposits held in the bank, and is the credit balance as per the passbook. This balance exists when the deposits made by your business at your bank are more than the withdrawals and indicates that you have a favourable balance as per the cash book or a favourable balance as per the passbook.

Whereas, credit balance as the cash book indicates an overdraft or the excess amount withdrawn from your bank account over the amount deposited. This is also known as an unfavorable balance as per the cash book or an unfavorable balance as per the passbook.

Make Necessary Adjustments in the Balance as per the Cash Book

Several items can cause a difference between cash book and passbook balances, these items are typically only reflected in the passbook. The following are adjustments that you need to make in order to prepare the bank reconciliation statement:

• Specify the balance as shown by the cash book as the first item in the statement or start with balance as per the passbook.
• Deduct checks deposited, but not yet collected or credited by the bank, into the company account.
• Add all checks issued, but not yet presented for payment, and the amounts directly deposited in the bank account.
• Deduct all charges, such as interest on an overdraft, bills, or checks dishonored, that have been debited by bank in the passbook but not yet entered in the cash book.
• Add all credits provided by the bank, like interest on dividends collected, and direct deposits to the bank.

After adjusting all the above items, you'll end up with the adjusted balance as per the cash book, which must match the balance as per the passbook.

It is important to note here that adjusting the cash book balance before preparing the bank reconciliation statement will reduce the number of items that could cause a difference between the cash book and passbook balances.

Therefore, such adjustment procedures help in determining the balance as per the bank that will go into the balance sheet.

However, there can be situations where your business has overdrafts at the bank, which is when a bank account goes into the negative as a result of excess withdrawals.

Now, such a figure will be shown as a credit balance in your cash book, however, in the bank statement, that balance will be showcased as a debit balance and is known as the debit balance as per the passbook.

Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.

Other Points to Remember

As per the rules mentioned above, the balance as per the cash book is the starting point for preparing a bank reconciliation statement (BRS). However, you can also start with the balance as per passbook when preparing a BRS, but the treatment for all the items mentioned above shall be reversed. Accordingly:

• checks issued but not yet presented are deducted from the balance as per the passbook
• checks deposited but not yet collected are added back to the balance as per the passbook
• dishonored bills and checks are added back to balance as per passbook
• charges in respect of interest on an overdraft are added back to balance as per passbook

There can be four different scenarios while preparing a bank reconciliation statement, including:

• a debit balance or a favourable balance as per cash book is given and the balance as per passbook needs to be determined
• a credit balance or an unfavorable balance as per cash book is given and the balance as per passbook needs to be determined
• a credit balance or a favourable balance as per passbook is given and the balance as per cash book needs to be determined
• a debit balance or an unfavorable balance as per passbook is given and the balance as per cash book needs to be determined
• the preparation of bank reconciliation statement after adjusting the cash book balance

Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. So it makes sense to record these items in the cash book first in order to determine the adjusted balance of the cash book. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared.

This way, the number of items that can cause the difference between the passbook and the cash book balance is reduced. And as a result, it gets easier to ascertain the correct balance in the balance sheet.

This means that only those items that can cause a difference due to a time delay in recording appear in the bank reconciliation statement. These items may include:

• checks issued but not yet presented
• checks deposited but not yet collected
• error with the passbook

Therefore, the bank reconciliation statement, using this approach, is prepared by following the steps below:

• specify the balance as per the passbook as the first item in the bank reconciliation statement
• add checks issued but not yet presented for payment
• deduct checks deposited but not yet collected or credited
• deduct checks debited in error

After adjusting all the above items what you'll get is the adjusted balance of the cash book.

Bank Reconciliation Problems

The purpose of preparing a bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook.

The differences between the cash book and passbook balance occur primarily due to the following reasons:

Timing Differences in Recording of Transactions

When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. One of the primary reasons this happens is due to the time delay in recording the transactions of either payments or receipts.

Various factors can impact a time delay including:

Cheques Issued by the Bank But Not Yet Presented for Payment

When your business issues a check to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash book. However, there might be a situation where the receiving entity may not present the checks issued by your business to the bank for immediate payment.

The bank will debit your business account only when they've paid these issued checks, meaning there is a time delay between the issuing of checks and their presentation to the bank. These time delays are responsible for the differences that arise in your cash book balance and your passbook balance.

Cheques Paid into the Bank But Not Yet Collected or Credited

When your business receives checks from its customers, these amounts are recorded immediately on the debit side of the cash book so the balance as per the cash book increases. However, there may be a situation where the bank credits your business account only when the checks are actually realised.

It is important to note that it takes a few days for the bank to clear the checks. This is especially common in cases where the check is deposited at a different bank branch than the one at which your account is maintained, which can lead to the difference between the balances.

Debits Made by the Bank on behalf of the Customer

At times, your bank may deduct certain amounts associated with various services directly from your bank account without your knowledge. You will me made aware of these deductions when you receive the statement from the bank.

These deductions may include:

• check collection charges
• incidental charges
• interest on overdraft
• unpaid checks deducted by the bank (bounced checks)

These debits made by the bank directly from your bank account will lead to a difference between balances.

Direct Deposits into the Bank Account

At times, your customers may directly deposit funds into your business’ bank account, but your business will not notified about this the bank statement is received.

In this instance, your bank has recorded the receipts in your business account at the bank, while you haven't recorded this transaction in your cash book. As a result, the balance shown in the bank passbook would be more than the balance shown in your company’s cash book.

Interest and Dividends Collected by the Bank

Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account. You will record such transactions only in your business' cash book only when you receive the bank statement, but until then, your balance as per the cash book would differ from the balance as per the passbook.

Direct Payments Made by the Bank

At times, you might give standing instructions to your bank to make payments regularly on specific days to third parties, such as insurance premiums, telephone bills, rent, sales taxes, etc.

As a result of these direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book.

Checks Deposited or Bills Discounted Dishonored

There are times when your business will deposit a check or draw a bill of exchange discounted with the bank. These deposited checks or discounted bills of exchange drawn by your business may get dishonored on the date of maturity. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account.

Such information is not available to your business immediately, so you record no entry in the business' cash book for the above items. You will know about this only when you receive the bank statement at the end of the month. As a result, your balance as per the passbook would be less than the balance as per the cash book.

Errors Made by Your Business or your Bank

At times, the balance as per the cash book and passbook may differ due to an error committed by either the bank or an error in the cash book of your company.

Errors Committed by your Business While Recording Transactions

At times, your business may either omit or record incorrect transactions for checks issued, checks deposited, or the wrong total, etc.

Such errors are committed while recording the transactions in the cash book, so the balance as per the cash book will differ from the passbook.

Bank Reconciliation Examples

Example 1: Preparation of Bank Reconciliation Statement Without Adjusting the Cash Book Balance

From the following particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2023:

Bank Reconciliation Record Keeping

You need to determine the underlying reasons responsible for any mismatch between balance as per cash book and passbook before you record such changes in your books of accounts.

There are two ways to record bank reconciliations:

Adjusting Journal Entries

Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits, and once these are recorded, the general ledger is prepared.

All of this can be done by using online accounting software like QuickBooks, but if you are not using accounting software, you can use Excel to record these items.

While reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. If this occurs, you simply need to make a note indicating the reasons for the discrepancy between your bank statement and cash book.

Preparing a Bank Reconciliation Statement

Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries as a separate document. This document will make auditors aware of the reconciled information at a later date.

How Do You Reconcile a Bank Statement?

The purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts and to ensure the balance as per the bank statement is correct.

To reconcile a bank statement with your business' books of accounts, you'll need to follow the steps below:

• The first step in bank reconciliation is to receive or download the bank statement from your bank at the end of each month. This statement will show any deposits made into the account, checks cleared by the bank, and other various charges against the account, like servicing fees.
• Match the deposits recorded in your books of accounts to the ones reflected in your bank statement. In case you have recorded a deposit in your records that the bank has not yet received during a particular month, mark this deposit as an item to be reconciled, this item should be added back to the bank’s closing cash balance for your account.
• Next, compare the amount of every deposit recorded by the bank to the deposit amounts recorded in your books of accounts. There may be a possibility that your bank has denied accepting a check within a collection of deposited checks or might have recorded an incorrect check amount. If this happens, you should add the amount of rejected checks back to the bank’s closing cash balance.
• Then, adjust the errors of any incorrect amount on the checks that you have recorded in your own books of accounts. But, if the bank committed an error you should inform the bank about the mistake and include the difference as a reconciling item.
• Now, match all the checks that have been listed on your bank statement, like the ones cleared by the bank, to the checks that are recorded in your own books. Then, start marking the checks in your own records that match with the checks listed on the bank statement. Do not forget to compare the amounts listed on the checks as well. In case there is a difference between the amount recorded by the bank and your own books of accounts, you'll need to either adjust your own records or contact the bank about this difference.
• Next, prepare a list of checks that have not been cleared by the bank. Checks presented but not cleared are reconciling items and need to be deducted from the bank’s closing cash balance for your account.
• Then, check the miscellaneous debits and credits listed on your bank statement, and verify that you have recorded such items in your own books of accounts, as there is a possibility that none of these items have been recorded in your own books. If this situation occurs, adjust your cash balance for these items before moving ahead. The miscellaneous items may include overhead charges, fees for bounced cheques, or fees for account maintenance.
• Finally, add or subtract all the items marked as reconciling items from your bank’s closing cash balance, then, compare the balance as per the cash book with the balance as per the passbook of your account. If the two balances do not match, it is possible that the opening balances also do not match. In this case, you will have to reconcile your bank statement with your books of accounts for the previous period. However, if there is no error in the beginning balances, then there is likely a reconciling item within the current period itself that you have failed to identify.
• Once you have identified all the differences and prepared a bank reconciliation statement, attach the bank reconciliation statement with the rest of your accounting records for future reference.

Understanding the Bank Reconciliation Statement

To reconcile your bank statement with your cash book, you'll need to ensure that the cash book is complete and make sure that the current month's bank statement has also been obtained.

The purpose of reconciling bank statements with your business' cash book is to ensure that the balance as per the passbook matches the balance as per the cash book.

However, sometimes there are differences between the two balances and so you'll need to identify the underlying reasons for such differences.

Required Information to Create a Bank Reconciliation Statement

In order to prepare a bank reconciliation statement, you'll need to obtain both the current and the previous month’s bank statements as well as the cash book.

Preparing a bank reconciliation statement is done by taking into account all transactions that have occurred up until the date preceding the day the bank reconciliation statement is prepared.

Make sure that you've also taken into account all deposits and withdrawals to an account when preparing the bank reconciliation statement.

Bank Reconciling Statement: Adjusting Balance per Bank

You'll need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or any checks issued that have not yet been presented for payment.

These checks are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment.

For example, if you issued a check on November 30, and are preparing the bank reconciliation statement for the month of November on November 30, 2023, it is unlikely that check issued has been cashed by the bank. As a result, you'll need to deduct the amount of these checks from the balance.

In addition, there may be cases where the bank has not cleared the checks, however, the checks have been deposited by your business. Banks take time in clearing checks, so the bank needs to add back the check's amount to the bank balance.

Bank Reconciling Statement: Adjusting Balance per cash Books

There are times when the bank may charge a fee for maintaining your account, which will typically be deducted automatically from your account. Therefore, when preparing a bank reconciliation statement you must account for any fees deducted from your account.

Any interest or dividends earned on investments will be directly deposited into your bank account after a specific period of time, so you'll need to create a journal entry in your books of accounts detailing the balance increase.

When all these adjustments have been made to the books of accounts, the balance as per the cash book must match that of the passbook. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly.

How Often Should You Reconcile Your Bank Account?

Ideally, you should run a reconciliation each time you receive the statement from your bank. The bank may send you a bank statement at the end of each month, each week, or, if your business has a large number of transactions, they may even send one at the end of each day.

Before you reconcile your bank account, you'll need to ensure that you've recorded all transactions from your business until the date of your bank statement. If you have access to online banking, you can download the bank statements when conducting a bank reconciliation at regular intervals rather than manually entering the information.

What Is the Purpose of Bank Reconciliation?

Conducting a bank reconciliation will help you:

• Compare your business’ cash book with the bank’s passbook to track the differences between the two balances.
• Make adjustments to the bank balance of your business' cash book in case there is a difference between the balance as per the cash book and the balance as per the passbook.
• To track any checks that have bounced or been altered, stolen or cashed without your knowledge.
• To detect fraudulent transactions.
• To help auditors undertake annual audits.
• To keep a track of accounts payable and accounts receivable of your business.

Helpful Tips for Bank Reconciliation Adjustments

Bank reconciliation is the process of comparing your business’ books of accounts with your bank statements and is done periodically to check whether the bank-related transactions are recorded properly in your books of accounts.

When your balance as per the cash book does not match with your balance as per the passbook, there are certain adjustments that you have to make in order to balance the two accounts.

While making Bank Reconciliation adjustments, you should take note of the following:

• Make sure that you have all the necessary documents before reconciling your bank statement with your cash book balances. The documents required include bank statements for the recorded period along with the completed cash book for the period being recorded.
• Ensure that you avoid common errors such as:
• Errors pertaining to the duplication of entries
• Missing out on recording certain transactions
• Committing transposition errors while recording figures in the books of accounts (e.g. recording $151,000, you record $115,000).
• Make sure that your bank didn't commit any errors, as they may have debited incorrect amounts from your account or credit funds that you do not own. In case your bank commits errors like these, make sure you reach out to the appropriate officials and inquire about any debits or credits made to your account by the bank about which you are doubtful.
• Ensure that bank reconciliation is undertaken on a regular basis, and make sure that the items that cause a difference between your cash book and the pass book balance are adjusted in your books of accounts. When differences are not adjusted, they keep accumulating and become harder to stay on top of.

Company’s Process for Preparing its Bank Reconciliation

When conducting a bank reconciliation, the process will typically follow these steps:

• First you'll need to determine if there are any differences between the amounts reflected in the bank statement with the amounts reflected in the cash book.
• Once you've identified the differences between the balance as per the cash book and the balance as per the passbook, you'll need to calculate the correct or the adjusted balance for your company’s cash. This can be done by listing your bank’s unadjusted cash balance, then the company’s unadjusted cash balance, and finally listing out the differences between the two balances.
• Finally, after differences between your cash balance and bank balance have been identified, you'll need to make adjustments to your company’s cash account.

Here is a deeper dive into the bank reconciliation process:

Step 1: Match Each Item on the Bank Statement to the Cash Account

• First, compare each deposit processed by your bank to the cash receipts or cash proceeds recorded in your company’s cash book. Check if there are any differences due to deposits in transit or any other errors committed by your bank, as these differences must be included in the bank reconciliation statement.
• Next, match the amount of each check paid or cleared by your bank with the amounts reflected in the cash book. If there are any differences, whether due to outstanding cheques or any other errors, be sure to specify the differences in the bank reconciliation statement.
• Finally, match all other items reflected in the bank statement with the items in the cash book. If there are any differences between the two balances, whether due to bank fees, insufficient funds, etc, be sure record these differences in the bank reconciliation statement.

Step 2: Work Out the Balance as Per Bank Side of the Bank Reconciliation Statement

Once you determine the differences between the balance as per the cash book and the balance as per the passbook, you'll need work out the balance as per the bank portion of the bank reconciliation statement.

To do this, you'll need to:

• Firstly, include the unadjusted balance from the bank statement as the first item in the balance per bank side of the bank reconciliation statement.
• Next, add the deposits in transit, which are the deposits not shown in the bank statement by the reconciliation date. This happens due to the time delay between the depositing of cash or a check and when the bank credits the amount.
• Then, deduct any outstanding checks, this amount will be deducted from the cash balance. These are check payments that have been recorded in the books of accounts of the issuing company but are yet to be cleared by the bank.
• Next, add or deduct any other items and the amounts that were not recorded correctly by your bank.
• Finally, total the amounts reflecting the above adjustments and include the total amount at the bottom as ‘Adjusted Balance As Per The Bank’.

Step 3: Work Out the Balance as Per the Cash Book Side of the Bank Reconciliation Statement

Once you've completed the balance as per the bank, you'll then need to work out the balance as per the cash book.

To do this, you'll need to:

• First, include the unadjusted balance from the general ledger cash account as the first item of the balance per cash book side of the bank reconciliation statement.
• Next, add any credits made to the company’s account by the bank due to interest earned, bank credit notes, etc. If you have not already recorded these credits, you can add them now.
• Then, deduct any charges that have been automatically debited by the bank. 
• Next, add or deduct any other items and the amounts that were not recorded correctly by your company.
• Finally, total the amounts reflecting the above adjustments and include the total amount at the bottom as 'Adjusted Balance As Per The Cash Book'.

Step 4: Make Sure the Balance As Per the Bank Matches the Balance As Per the Cash Book

Once you have made the adjustments in the bank reconciliation statement, you'll need to verify that the totals of both the adjusted balance as per the bank and the adjusted balance as per the cash book match.

Step 5: Record All Adjustments As Per Cash Book Into Your Company’s General Ledger Cash Account

After adjusting the balance as per the cash book, you'll need record all adjustments in your company’s general ledger accounts. 

Be sure to include the journal entries of all adjustments made to the balance as per the cash book, and then ensure that the cash account balance is equal to the adjusted balance per then cash book shown in the bank reconciliation statement.

Quick Bank Reconciliation with QuickBooks Accounting Software

Looking for a quicker way to reconcile your statement? Using cloud accounting software, like Quickbooks, makes preparing a reconciliation statement easy. Because your bank account gets integrated with your online accounting software, all your bank transactions will get updated automatically and each item will be matched with your books of accounts.