Bank Reconciliation Statement

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A company's general ledger account 'Cash' contains a record of the transactions (checks written, receipts from customers, etc.) that involve its checking account. The bank also creates a record of the company's checking account when it processes the company's checks, deposits, service charges, and other items. Bank reconciliation is the process of comparing and matching figures from the accounting records against those shown on a bank statement. The benefit of reconciling the bank statement is knowing that the amount of Cash reported by the company (company's books) is consistent with the amount of cash shown in the bank's records.

Any transaction in the accounting records not found on the bank statement IS said to be outstanding. Taking the balance on the bank statement adding the total of outstanding receipts less the total of the outstanding payments this new value should (match) reconcile to the balance of the accounting records.

Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies. Discrepancies could include: checks recorded as a lesser amount than what was presented to the bank; money received but not lodged; or payments taken from the bank account without the business's knowledge. For example a bank service charge might be deducted on the bank statement on January 31, but the company will not learn of the amount until the company receives the bank statement in early February. Similarly, checks written near the end of January are deducted immediately on the company's books, but those checks are more likely to clear the bank account only in early February. It is also possible that neither balance is the true balance. Both balances may need adjustment in order to report the true amount of cash. A bank reconciliation done regularly can reduce the number of errors in an accounts system and make it easier to find missing purchases and sales invoices.

After you adjust the balance per bank to be the true balance and after you adjust the balance per books to also be the same true balance, you have reconciled the bank statement.

Bank Reconciliation Process

The first step in bank reconciliation is to adjust the balance on the bank statement to the adjusted, or corrected balance.

Balance per Bank Statement

Add: Deposits in transit

Deduct: Outstanding checks

Add or Deduct: Bank errors

Adjusted/Corrected Balance per Bank

Deposits in transit refers to checks/ deposits that are already included in the company's Cash account but are not yet on the bank statement.

Outstanding checks are checks that have been written and recorded in the company's Cash account, but have not yet cleared the bank account. Checks written in the last few days of the month are common example.

Second step in the process is to adjust the balance in the company's Cash account so that it reflects the adjusted or corrected balance.

Balance per Books

Adjustments:

Deduct: Bank service charges

Add: Interest earned

Add: Notes Receivable collected by bank

Add or Deduct: Errors in company's Cash account

Adjusted/Corrected Balance per Books

Bank service charges are various fees charged by the bank for its services. They are deducted by the bank immediately but are recorded on company's books only after the receipt of bank statement.

Interest earned will appear on the bank statement when the bank gives a company interest on its account balances. However it comes on the company's books only after the receipt of bank statement.

Notes Receivables are assets of a company. When notes come due, the company might ask its bank to collect the note receivable. Again there might be some time difference between the time they are recorded on the bank and on company's books.

After adjusting the balance per bank and the balance per books, the two adjusted amounts should be equal.

Final step is to prepare Journal entries for the adjustments to the balance per books. Adjustments to increase the cash balance will require a journal entry that debits Cash and credits another account while the adjustments to decrease the cash balance will require a credit to Cash and a debit to another account.