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    Bank Reconciliation and Examples

    Bank Reconciliation

    The bank reconciliation is a control, carried out by the accountant in order to bring the bank accounts as close as possible to the reality of the account statements, that is to say to verify the concordance of the two accounts (bank account and statement of account).

    It consists of establishing a correspondence between the movements recorded on the bank statement and the transactions recorded in the company’s accounts. This well-done process will make it possible to identify any errors, identify and justify the various discrepancies observed. The reconciliation process results in the inclusion of adjustment postings.

    The technique of the reconciliation statement will make it possible to justify the differences in balances.

    Bank reconciliation therefore consists in associating (pointing) the transactions already recorded in the company and in the bank in order to reveal isolated entries, that is to say recorded only by the bank or the establishment.

    Stakes or problems of bank reconciliation

    This allows errors to be detected during recordings such as forgetting or mistakes made.

    By eliminating the differences between the statement and the accounting to get closer to reality, it is possible to detect:

    forgotten records;
    bank charges, bank charges, which we discover on the account statement;
    errors in accounting records;
    lags of certain operations known to the establishment first and which the bank records afterwards, or vice versa.
    (Knowing that the accounting transaction may appear the following month on the bank statement)

    Bank Reconciliation Statement and Examples

    The bank reconciliation statement is a valuable tool to identify the differences between the balance according to the cash book and the bank statement. Bank reconciliation also makes it possible to detect certain frauds and manipulations. It is good practice to perform this exercise at regular intervals, which helps to maintain controls in the organization. This also helps to keep the cash book up to date as transactions that are correctly recorded in the bank statement can be recorded in the cash book.

    Example 1
    From the Given  particulars, prepare Bank Reconciliation statement
    for M/s XYZ and company as at 31st December, 2020
    Bank Reconciliation Statement                                                                                                Month Ended 31st December 2020
    ParticularsAmount
    Balance as per Bank Book8 000
    Add:Unpresented Cheques
    Cheque Presented on 05.03.201925 000
    Cash Deposited Directly by Customer not Recorded in Books50 000
    Less:Deposit in Transit10 000
    Dishonoured Cheque by Bank20 000
    Bank Charges1 050
    Balance as per Bank Books51 950
    Example 2
    Prepared Bank Reconciliation Statement for 31st January, 2020.
    Below is Bank Statement of ABC Limited:
    Bank Statement of ABC International Limited
     Account with State Bank of World
     Date Particulars Withdrawals(Dr) Deposits (Cr) Balance
    01/01/2019 Balance 30,26,780
    01/08/2019 Issued to Supplier GG (Cheque NO 12345) 6,70,000 23,56,780
    01/12/2019 Cheque Deposited from Customer DF 5,00,000 28,56,780
    16/01/19 Cheque Deposited from Customer BG 2,30,000 30,86,780
    18/01/19 Issued to XYZ Ltd (Cheque No 45678) 1,55,000 29,31,780
    22/01/19 BC Ltd (Cheque No 12347)86 000 28,45,780
    27/01/19 Wages (Cheque No 12348)10 950 28,34,830
    30/01/19 Cheque Unpaid (Customer DF) 5,00,000 23,34,830
    30/01/19 Bank Charges900 23,33,930
    Below is Bank Account Ledger in the Books of ABC International Limited:
    Books of ABC Limited
    Bank Account State Bank of World
    DateParticularsDebitCreditBalance
    01/01/2019Balance 30,26,780
    01/08/2019 Issued to Supplier GG (Cheque NO 12345) 6,70,000 23,56,780
    01/12/2019 Cheque Deposited from Customer DF 5,00,000 28,56,780
    01/12/2019 Cheque Deposited from Customer BG 2,30,000 30,86,780
    01/12/2019 Issued to XYZ Ltd (Cheque No 45678) 1,55,000 29,31,780
    19/01/19 BC Ltd (Cheque No 12347)86 000 28,45,780
    26/01/19Issued to DFP Cheque No 123492,20,000 26,25,780
    28/01/19 Wages (Cheque No 12348)10 950 26,14,830
    31/01/19 Issued to XYZ Ltd (Cheque No 50006)450000 21,64,830
    31/01/19 Cheque from Customer C Deposited in Bank700000 28,64,830
    Example 3
    Bank Reconciliation Statement                                                                                                                                                  Month Ended 31st January 2021
    ParticularsAmount
    Balance as per Bank Book2 864 830
    Add:Unpresented Cheques
    26/01/2019Cheque Issued to DFP Limited (Chq. No. 12349), Not Presented in Bank220 000
    12/01/2019Cheque Issued to XYZ Limited (Chq. No. 50006), Not Presented in Bank450 000
    Less:
    31/01/2019Deposit in Transit700 000
    30/01/2019Cheque of Customer DF Dishonoured by Bank500 000
    31/01/2019Bank Charges Not Recorded in Books900
    Balance as per Bank Books2 333 930

    How to perform a bank reconciliation?

    What you need:
    To perform a bank reconciliation, you need your bank statements, your ‘bank account’ entries in your accounting, as well as your previous bank reconciliation, if you already have one.

    What you should do:
    The process consists of verifying each line of your bank statement one by one with the corresponding bank account records. You must verify the existence of the accounting movement as well as the accuracy of the amounts.

    Regularization:
    Once the discrepancies or deviations have been identified, it is a matter of regularizing the entries. Any missing entries are entered in the bank account for example account n° 512.

    Verification:
    At the end of the process, it is checked that the balance of the bank statement is indeed the same as the balance of the Bank for example n° 512 account in the accounts, plus or minus the sums of money that the bank has not actually received yet. After you have checked all the deposits and withdrawals, your business bank balance should match the totals in your business accounts. This will be the starting point for your next reconciliation.

    The sums not yet debited or received by the bank must be regularized if possible during the next bank reconciliation.

    Read also: Accounting Journals | What are Journal Entries in Accounting?

    How to do bank reconciliation with steps and examples

    Suppose you run a business called Handy Stand. When you receive your bank statement at the end of the month, this is how you reconcile it.

    There are 3 steps: comparing your statements, adjusting your balances, and recording the reconciliation.

    Step one: Comparing your statements

    First, you compare your bank statement for the month of March with your cash book balance for the end of March. They look like this:

    Bank balance: $1,081

    Cash book balance: $1,200

    Second, you go through your bank statement, and find the following line items not included in your cash book:

    Email money transfer fees, multiple dates: $7

    Checking account fee on Mar. 28: $12

    Third, you go through your cash book, and find the following line items not included in your bank statement:

    Check deposited on Mar. 27: $8
    Check deposited on Mar. 28: $4
    Check issued on Mar. 28: $20

    With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.

    Step two: Adjusting your balances

    Adjustments to bank account balance

    Original balance: $1,081

    Step 1: Add outstanding deposits

    DateDepositBalance
    Mar. 27801,161
    Mar. 28401,201
    March total120$1,201

    Step 2. Deduct outstanding withdrawals

    DateWithdrawalBalance
    Mar. 28201,181
    Mar. total20$1,181

    Adjusted balance: $1,181

    Adjustments to books balance:

    Original balance: $1,200

    Step 1: Add outstanding deposits
    DateWithdrawalBalance
    N/AN/A1,200
    March totalN/A$1,200
    Step 2: Deduct outstanding withdrawals
    DateWithdrawalBalance
    Mar. 3 (email transfer fee)11,199
    Mar. 7 (email transfer fee)11,198
    Mar. 19 (email transfer fee)11,197
    Mar. 20 (email transfer fee)11,196
    Mar. 22 (email transfer fee)11,195
    Mar. 25 (email transfer fee)11,194
    Mar. 27 (email transfer fee)11,193
    Mar. 28 (account fee)121,181
    March totalN/A$1,181

    Adjusted balance: $1,181

    Now that both your bank statement and your books share the same end-of-month balance for March, you have the real balance: $1,181.

    Step three: Recording the reconciliation

    When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions.

    You have two options for recording your bank reconciliation. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed).

    A cash book note:

    At the bottom of your spreadsheet for March, add this note, tracking changes to your balance.

    Bank Reconciliation

    DetailAmount
    Cash book balance1,200
    Add: Outstanding deposits0
    Subtotal1,200
    Less: Outstanding withdrawals (fees)19
    Bank statement balance$1,181
    Bank reconciliation statement:

    Business name: Handy Stand

    Bank statement date: March 28, 2020

    Bank account: Business Checking

    Outstanding Withdrawals
    DateDetailAmount
    Mar. 3Email transfer fee1
    Mar. 7Email transfer fee1
    Mar. 19Email transfer fee1
    Mar. 20Email transfer fee1
    Mar. 22Email transfer fee1
    Mar. 25Email transfer fee1
    Mar. 27Email transfer fee1
    Mar. 28Checking account fee12
    Total$19
    Outstanding Deposits
    DateDetailAmount
    NoneN/A0
    Total$0
    Reconciliation
    DetailAmount
    Cash book balance1,200
    Add: Outstanding deposits0
    Subtotal1,200
    Less: Outstanding withdrawals (fees)19
    Bank statement balance$1,181

    What if something doesn’t match?

    It is normal to see minor differences due to timing, including items that have not yet been cleared by the bank, but you should be able to explain these differences easily. For example:

    You can write a check to a vendor and reduce your account balance on internal systems accordingly, but your bank will show a higher balance until the check reaches your account. These checks are called outstanding checks.
    An automatic electronic payment can wipe your account a day before or after the end of the month, and you might expect to see it in a different month.
    When you can easily report the variances, there is probably no need to worry. When it takes longer to find and correct the discrepancies, larger issues may need to be addressed.

    To detect bank errors: it’s rare, but sometimes the bank will make a mistake. If there’s a discrepancy in your accounts that you can’t explain any other way, it may be time to speak to someone at the bank.

    Source: PinterPandai

    Photo credit: Pixabay