2020-12-05 22:22:28ReportsEnglishhttps://quickbooks.intuit.com/global/resources/row_qrc/uploads/2020/12/Bank-Reconciliation.pnghttps://quickbooks.intuit.com/global/resources/reports/bank-reconciliation-process/Bank Reconciliation: Purpose, Example, and Process

Bank Reconciliation: Purpose, Example, and Process

32 min read

In this article, you will learn:

In today’s world, the transactions, whether receipts or payments are done via the bank. That is, a bank accepts various forms of deposits as well as lends finance to those in need. Furthermore, a portion of funds collected in the form of deposits is also invested in profitable investments.

Therefore, the funds are made available to those in need which otherwise would have remained idle. Thus, a bank receives deposits from and handles cash transactions on behalf of its customers besides providing various other services.

So, all the deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records transactions in a bank statement (also known as Pass Book) whereas the customer records all the bank transactions in a cash book.

Now, the bank balance showcased in the passbook or the bank statement must match with the balance reflected in the cash book of the customer. And the customer has to reconcile the cash book with the bank statement to report errors, if any, to the bank.

In this article, we are going to discuss what is Bank Reconciliation, Bank Reconciliation Procedure, the Purpose of Bank Reconciliation, and Bank Reconciliation Example.

Introduction to Bank Reconciliation

Bank reconciliation is the process of matching the bank balances reflected in the cash book of a business with the balances reflected in the bank statement of the business in a given period. Such a process determines the differences between the balances as per the cash book and bank passbook.

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

Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. This may result in bounced cheques or overdraft fees.

In addition to ensuring correct cash records, the bank reconciliation process also helps in keeping a track of the occurrence of any form of fraud. Such insights would help you as a business to control cash receipts and payments in a much better way.

Bank Reconciliation Terminology

  • Deposits in Transit

Deposits in transit are also referred to as outstanding deposits. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or cheque into its bank account and when your bank credits the same.

Now, your business records the increase in bank balance in its books of accounts the moment it deposits cash or cheque in its bank account. This means that the balance as per the cash book is greater than the balance as per the passbook till the time the bank processes such a deposit.

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

  • Bank Service Charge

A bank charges various types of fees to you as an account holder. Such fees are charged to maintain your account with the bank. In addition to the maintenance fees, the bank charges a fee in respect of other specific transactions. Such fee may include:

  • Cheque clearing charges
  • Charges for fund transfer
  • Collection charges, etc

Such bank charges are charged to your account directly. This reduces your bank balance as reflected in your bank statement. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month.

As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs 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 honor your check. This is because the checking account on which the check is drawn does not have sufficient funds to honor the check.

In addition to this, the NSF may also refer to a situation where an individual intends to purchase with a credit card but is unable to do so. This is because there are insufficient funds in the associated bank account to make a purchase.

NSF check is an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. But this is not the case as the bank does not clear an NFS check.

As a result, the cash on hand balance gets reduced.

  • Outstanding Check

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

This means that the bank balance of the company is greater than the balance reflected in its cash book.

Bank Reconciliation Procedure

Before discussing the procedure to reconcile the cash book balance with passbook balance it is important to note that ‘Debit balance as per cash book’ means deposit in bank or cash at bank or ‘Credit balance as per passbook’. Likewise, ‘Credit balance as per cash book means excess amount over deposits withdrawn by the account holder or overdraft balance or ‘Debit balance as per passbook.’ This means that 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

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

  • Preparation of 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 this approach, you can take balance as per the cash book or balance as per the passbook as your starting point.

As mentioned above, debit balance as per cash book means the deposits held in the bank. Further, such a balance would be a credit balance as per the passbook. Now, such a balance exists when the deposits made by your business at your bank are more than the withdrawals.

So, this indicates that you have a favorable balance as per the cash book or a favorable balance as per the passbook.

Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited.

This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook.

Now, while preparing the bank reconciliation statement we can encounter four different situations:

  • Make Necessary Adjustments in the Balance as per cash book

Several items cause a difference between cash book and passbook balances. Typically, such items mainly reflect in the passbook only. The following are the adjustments that you need to make to prepare the bank reconciliation statement:

  • Specify the balance as shown by the cash book as the first item in the statement. Or you can start with balance as per the passbook as well.
  • Deduct checks deposited but not yet collected or credited by the bank into the company account.
  • Add all the 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, payment by the bank on standing instructions, and debited by bank in the passbook but not entered in the cash book, bills and cheques dishonored, etc
  • Add all credits provided by the bank like interest on dividends collected and direct deposits in the bank.

After adjusting all the above items, what you get is the adjusted balance as per the cash book. This balance must match with the balance as per the passbook.

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

Therefore, such adjustment procedure helps in determining balance as per bank that goes into the balance sheet.

The above case presents preparing a bank reconciliation statement starting with positive bank balances.

However, there can be situations where your business has overdrafts at the bank.

As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits.

Now, such a figure is shown as a credit balance in your cash book. However, in the bank statement, such a balance is 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, balance as per cash book is the starting point for preparing bank reconciliation statements. However, you can also start with balance as per pass book for preparing BRS. In case you do so, the treatment for all the items mentioned above shall be reversed. Accordingly:

    • cheques issued but not yet presented are deducted from the balance as per the passbook
    • cheques deposited but not yet collected are added back to the balance as per the passbook
    • dishonored bills and cheques 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. These include:

  • debit balance or favorable balance as per cash book is given and balance as per pass book needs to be determined
  • credit balance or unfavorable balance as per cash book is given and balance as per pass book needs to be determined
  • credit balance or favorable balance as per pass book is given and balance as per cash book needs to be determined
  • debit balance or unfavorable balance as per pass book is given and balance as per cash book needs to be determined
  • 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. Therefore, it makes sense to first record such items in the cash book 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. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet.

This means that only those items that cause difference due to a time lag in recording such items appear in the bank reconciliation statement. Such items may include:

  • cheques issued but not yet presented
  • cheques deposited but not yet collected
  • error in passbook, etc

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

  • specify the balance as per 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 get is the adjusted balance of the cash book.

Bank Reconciliation Problems

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

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

  • Timing Differences on 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 responsible for such a difference is the time gap in recording the transactions of either payments or receipts.

Now, various factors affect such a time gap. These include:

  • Checks Issued by the Bank But Not Yet Presented for Payment

When your business issues to its suppliers or creditors, such 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 so issued by your business to the bank for immediate payment.

The bank will debit your business account only when the bank pays these issued checks.

So, this means there is a time lag between the issue of check and its presentation to the bank.

Such a time lag is responsible for the differences that arise in your cash book balance and your passbook balance.

  • Checks Paid into the Bank But Not Yet Collected or Credited

When your business receives checks from its customers, such amounts are recorded immediately on the debit side of the cash book.

As a result, the bank 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 realized.

It is important to note that it takes a few days for the bank to clear the checks especially in case of the:

  • outstation checks
  • checks paid in at a bank branch other than the one at which your firm account is maintained

Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook.

  • 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 come to know about such deductions only when you receive the statement from the bank.

The deductions may include:

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

Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook.

  • Direct Deposits into the Bank Account

At times, your customers directly deposit funds into your firm’s bank account. But, your business entity does not receive any intimation about the same till the time it receives the bank statement.

In such a case, your bank records the receipts in your firm’s account at the bank. However, you do not record such a transaction in your cash book. As a result, the balance showcased in the bank passbook would be more than the balance shown in your firm’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.

But, you will record such transactions only in your firm’s cash book only when you receive the bank statement. 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 some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, taxes, etc are directly paid by your bank on your behalf and debited to your account.

As a result of such 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 entity deposits a check or draws a bill of exchange discounted with the bank. However, such deposited checks or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity.

As a result, the bank debits the amount against such dishonored checks or bills of exchange to your bank account.

Such information is not available to your business immediately. Therefore, you record no entry in the firm’s cash book for the above items.

You will know about such information 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 bank or an error in the cash book of your firm.

The following are the errors that can be committed on the part of the bank as well as the firm:

  • Errors Committed by the Firm While Recording Transactions

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

Such errors are committed while recording the transactions in the cash book. As a result, the balance as per the cash book differs from the passbook.

  • Errors Committed by the Bank While Recording Transactions

At times, your bank may omit or record incorrect transactions of checks deposited, wrong total, etc.

Such errors are committed while recording the transactions in the bank passbook. As a result, the balance as per the cash book differs from the passbook.

  • Bank Reconciliation Example

Example 1: Preparation of Bank Reconciliation Statement Without Adjusting the cash book Balance

From the following particulars of Zen Entreprises, prepare a bank reconciliation statement as of December 31, 2019.

ParticularsAmount in Dollars
Overdraft as per passbook20,000
Interest on overdraft2,000
An insurance premium paid by the bank200
Check issued but not presented for payment6,500
Check deposited but not yet cleared6,000
Wrongly debited by the bank500
Bank Reconciliation Statement as on December 31, 2019
S.No.ParticularsAmount $ (+)Amount $ (-)
Overdraft as per passbook20,000
Interest on overdraft2,000
An insurance premium paid by the bank200
Check issued but not presented for payment6,500
Check deposited but not yet cleared6,000
Wrongly debited by the bank500
Overdraft balance as per cash book17,800
  • Bank Reconciliation Record Keeping

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

Now, 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. Once the journal entries are recorded, the general ledger is prepared.

All of this can be done by using online accounting software like Quickbooks. In case you are not using software, you can go for Excel sheets to record such items.

Now, 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.

In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book.

  • Preparing 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 record as a separate document.

Such a document makes the auditors aware of the reconciled information at a later date.

  • How Do You Reconcile a Bank Statement?

Bank reconciliation is the process of comparing balance as per cash book with balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts.

The very idea of locating differences is to update your books of accounts in order to match them with the bank statement.

In other words, bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct.

So, to reconcile a bank statement with your firm’s books of accounts, you 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. Such a statement showcases the deposits made into the account, checks cleared by the bank, and various other charges against the account like servicing fees.
  • Match each of 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 which the bank has not yet received during a particular month, mark this deposit as an item to be reconciled. That is, such an 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 might be a possibility that your bank must have denied accepting a check within a collection of deposited checks or might have recorded an incorrect check amount. In case this happens, you should add back the amount of such a rejected check to the bank’s closing cash balance.
  • Then, adjust the errors of an incorrect amount of the check that you have recorded in your own books of accounts. But, if the bank committed such an error, then you should inform the bank about such a mistake and include such a difference as a reconciling item.
  • Now, match all the checks that have been listed on your bank statement like the ones that have been cleared by the bank to those checks that are recorded in your own books. Then, start marking those checks in your own records that match with the checks listed on the bank statement. Do not forget to compare the amounts of the checks as well. In case there is a difference between the amount recorded by the bank and your own books of accounts, you need to adjust either your own records or intimate the bank about such a difference.
  • Next, prepare a list of checks that have not been cleared by the bank. Checks presented but not cleared is a reconciling item and hence needs 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. Verify that you have recorded such items in your own books of accounts. There can be a possibility that none of such items have been recorded in your own books. In case of such a situation, adjust your cash balance for such items before moving ahead. The miscellaneous items may include overhead charges, fees for bounced checks, fees for account maintenance, etc.
  • 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. In case the two balances do not match, it is quite possible that the opening balances also did not match. In such a case, you will have to reconcile your bank statement with your books of accounts for the previous period. If there is no error in the beginning balances, then there is certainly 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 such a statement with the rest of your accounting records for future reference.

It is important to note that with the coming up of cloud accounting software like Quickbooks, preparing a reconciliation statement is easy. This is because your bank account gets integrated with your online accounting software. Thus, all your bank transactions get updated automatically. Furthermore, each of the items is matched with your books of accounts.

Understanding the Bank Reconciliation Statement

As mentioned above, the process of comparing your cash book details with the records of your firm’s bank transactions as recorded by the bank is known as bank reconciliation.

To undertake such a process, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank.

The very purpose of reconciling bank statements with your firm’s cash book is to ensure that the balance as per the passbook must match with the balance as per the cash book.

However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences.

What Are the Steps to Reconcile a Bank Statement?

Once you receive the bank statement at the end of the month, you need to follow the steps below for undertaking bank reconciliation:

  • Download the bank statement at the end of each month.
  • Match each of the deposits recorded in your books of accounts to the ones reflected in your bank statement.
  • Adjust the errors of incorrect amounts of the checks that you have recorded in your own books of accounts. However, if the bank committed such an error, then you should inform the bank about such a mistake and include such a difference as a reconciling item.
  • Now, match all the checks that have been listed on your bank statement like the ones that have been cleared by the bank to those checks that are recorded in your own books. In case of a difference adjust either your own records or intimate the bank about such a difference.
  • Next, prepare a list of checks that have not been cleared by the bank. Checks presented but not cleared is a reconciling item. Hence, it needs 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. Adjust your cash balance for such items in case they are not recorded in your cash book.
  • 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.
  • Once you have identified all the differences and prepared a bank reconciliation statement, attach such a statement with the rest of your accounting records for future reference.

Required Information to Create Bank Reconciliation Statement

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

Then you need to prepare a bank reconciliation statement. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared.

This is because certain transactions would occur on the date when the bank reconciliation statement is prepared.

Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement.

Bank Reconciling Statement: Adjusting Balance per Bank

You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the checks issued but not yet presented for payment.

Such checks are the ones that have been issued by your business but the recipient has not presented such a check with the bank for the collection of payment.

For instance, you issue a check on November 30. Now, when you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the check issued on November 30 is unlikely to be cashed by the bank.

Therefore, you need to deduct the amount standing against such a check from your bank balance. In addition to this, there may be a case where the bank has not cleared the checks. However, such checks have been deposited with the bank by your firm.

Banks take time in clearing the checks. Therefore, the bank needs to add back such an amount to the bank balance.

Bank Reconciling Statement: Adjusting Balance per Books

At times, the bank may charge a fee for maintaining your account. Such a fee is typically deducted automatically from your account.

Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account.

In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time.

Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned.

Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match with 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 reconcile your books of accounts with your bank account each time you receive the statement from your bank. Typically, the bank sends your bank statement at the end of each month, every week, and even at the end of each day in case of businesses having a huge number of transactions.

Now, before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement.

In case you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information.

What Is the Purpose of Bank Reconciliation?

The following points indicate the purpose of undertaking the bank reconciliation process:

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

Helpful Tip for Bank Reconciliation Adjustments

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

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

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

  • Make sure that you have all the required documents before reconciling your bank statement with your cash book balances. That means, make sure that you have the month-end bank statement as well as the completed cash book at your disposal. All such documents would give you a better view of all the things.
  • Ensure that you avoid committing 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. For example, instead of recording US$ 151,000, you record US$ 115,000.
    • Putting commas and dots at wrong places lead to significant errors
  • Make sure that your bank does not commit any errors. There might be a possibility that your bank may debit incorrect amounts from your account or credit funds that you do not own. In case your bank commits errors like these, reach out to the appropriate bank officials and intimate 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. Also, make sure that the items that cause a difference between your balance as per cash book and balance as per pass book are adjusted in your books of accounts. In case such differences are not adjusted, they keep on accumulating. Therefore, such negligence would make your bank reconciliation meaningless.

Company’s Process for Preparing its Bank Reconciliation

The bank reconciliation procedure includes the following generic steps:

  • The first step is to determine if there are any differences between each amount reflected on the company’s bank statement with each and every amount showcased in the company’s cash book.
  • Once you identify the differences between balance as per cash book and balance as per the passbook, you need to figure out the correct or the adjusted balance for your company’s cash. This is done by first listing your bank’s unadjusted cash balance, your company’s unadjusted cash balance, and then finally listing out the differences that you were able to figure out between the two balances.
  • Finally, when you are able to figure out the differences between your cash balance and bank balance, you need to make adjustments to your company’s cash account.

Therefore, to prepare the bank reconciliation statement for a company in a proper manner, we need to follow the steps below:

Step #1: Match Each Item On the Bank Statement With Every Item in Your Company’s Cash Account

  • Firstly, compare each and every deposit processed by your bank with 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. All such differences must be showcased on your bank reconciliation statement.
  • Next, match the amount of each and every check paid or cleared by your bank with each and every amount reflected in your company’s cash book. In case there are any differences, due to outstanding checks or any other errors, specify such differences in your company’s bank reconciliation statement.
  • Finally, match all the other items reflected in your company’s bank statement with the items showcased in the company’s cash book. In case there are any differences between the two balances due to bank fees, dishonored due to insufficient funds, etc, record such 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 balance as per cash book and balance as per the passbook, you need to start working on the Balance as per the Bankside of your Bank Reconciliation Statement.

To do this, follow the steps below:

  • First, mention the unadjusted balance from your company’s bank statement as the first item of the ‘Balance Per Bank’ side of your Bank Reconciliation Statement.
  • Next, you need to add the ‘Deposits in Transit’, that is, the deposits not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or cheque into its bank account and when your bank credits the same.
  • Then, deduct outstanding checks, if there are any, Outstanding Checks refers to check payments that have been recorded in the books of accounts of the issuing company. But, such checks have not yet been cleared by the bank account of such a company as a deduction from its cash balance.
  • Next, add or deduct any other items along with their amounts that were not recorded correctly by your bank.
  • Finally, total the amounts reflecting the above adjustments and show the total amount at the bottom as ‘Adjusted Balance As Per Bank’.

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

Once you complete the Balance as per the Bank Side of your company’s Bank Reconciliation Statement, the next step is to start working on the Balance as per the Cash Book side of your Bank Reconciliation Statement.

To do this, follow the steps below:

  • First, mention the unadjusted balance that appears on your company’s General Ledger Cash Account as the first item of the ‘Balance Per Cash Book’ side of your Bank Reconciliation Statement.
  • Next, you need to add any credits made to the company’s bank account by the bank on account of interest earned, bank credit memos, etc. That means, these are the credits that have been directly made by your bank into the company’s bank account and the company was not intimated about the same. Since such amounts were recorded in the bank statement but were not recorded in the company’s Cash Account, you need to add such amounts now.
  • Then, deduct any charges that have been debited by the bank directly without intimating the company about the same. Such charges may include a bank service charge, bank debit memos, return items, etc. You need to deduct such items from your company’s cash account as these were reflected in your bank statement but not your company’s cash account. So you need to deduct such charges from the company’s cash account now.
  • Next, add or deduct any other items along with their amounts that were not recorded correctly by your company.
  • Finally, total the amounts reflecting the above adjustments and show the total amount at the bottom as ‘Adjusted Balance As Per Cash Book ‘.

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

Once you have incorporated the adjustments in the Bank Reconciliation Statement, you have to ensure that the totals of both the sides mentioned at the bottom must match.

In other words, the Adjusted Balance as per Bank must match with the Adjusted Balance as per Cash Book.

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

After adjusting the balance as per Cash Book, make sure that you record all such adjustments in your company’s General Ledger Accounts. This is because, on the date of bank reconciliation, such adjustments have not been recorded in your company’s General Ledger Accounts.

You must post the journal entries of all the adjustments made to the Balance as Per Cash Book. Once you post the journal entries for all the adjustments made to the Balance as Per Cash Book into your company ledger accounts, make sure that the Cash account balance is equal to the Adjusted balance per Cash Book shown in the bank reconciliation statement.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Small business bank accounts: what you need to know before making a choice

Managing cash is a challenge. WalletHub’s 2019 Small Business Owner Survey found…

Read more

General Ledger: Meaning, Classification, and Examples

In this article, you will learn: What is General Ledger? Simplified Meaning…

Read more

How to Choose the Best Home Accounting Software?

In this article, you will learn: What is Home Accounting Software? Features…

Read more