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 | ||
| Particulars | Amount | |
| Balance as per Bank Book | 8 000 | |
| Add: | Unpresented Cheques | |
| Cheque Presented on 05.03.2019 | 25 000 | |
| Cash Deposited Directly by Customer not Recorded in Books | 50 000 | |
| Less: | Deposit in Transit | 10 000 |
| Dishonoured Cheque by Bank | 20 000 | |
| Bank Charges | 1 050 | |
| Balance as per Bank Books | 51 950 | |
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 Charges | 900 | 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 | ||||
| Date | Particulars | Debit | Credit | 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 | |
| 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 | |
| 26/01/19 | Issued to DFP Cheque No 12349 | 2,20,000 | 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 Bank | 700000 | 28,64,830 | |
Example 3
| Bank Reconciliation Statement Month Ended 31st January 2021 | ||
| Particulars | Amount | |
| Balance as per Bank Book | 2 864 830 | |
| Add: | Unpresented Cheques | |
| 26/01/2019 | Cheque Issued to DFP Limited (Chq. No. 12349), Not Presented in Bank | 220 000 |
| 12/01/2019 | Cheque Issued to XYZ Limited (Chq. No. 50006), Not Presented in Bank | 450 000 |
| Less: | ||
| 31/01/2019 | Deposit in Transit | 700 000 |
| 30/01/2019 | Cheque of Customer DF Dishonoured by Bank | 500 000 |
| 31/01/2019 | Bank Charges Not Recorded in Books | 900 |
| Balance as per Bank Books | 2 333 930 | |
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
| Date | Deposit | Balance |
|---|---|---|
| Mar. 27 | 80 | 1,161 |
| Mar. 28 | 40 | 1,201 |
| March total | 120 | $1,201 |
Step 2. Deduct outstanding withdrawals
| Date | Withdrawal | Balance |
|---|---|---|
| Mar. 28 | 20 | 1,181 |
| Mar. total | 20 | $1,181 |
Adjusted balance: $1,181
Adjustments to books balance:
Original balance: $1,200
Step 1: Add outstanding deposits
| Date | Withdrawal | Balance |
|---|---|---|
| N/A | N/A | 1,200 |
| March total | N/A | $1,200 |
Step 2: Deduct outstanding withdrawals
| Date | Withdrawal | Balance |
|---|---|---|
| Mar. 3 (email transfer fee) | 1 | 1,199 |
| Mar. 7 (email transfer fee) | 1 | 1,198 |
| Mar. 19 (email transfer fee) | 1 | 1,197 |
| Mar. 20 (email transfer fee) | 1 | 1,196 |
| Mar. 22 (email transfer fee) | 1 | 1,195 |
| Mar. 25 (email transfer fee) | 1 | 1,194 |
| Mar. 27 (email transfer fee) | 1 | 1,193 |
| Mar. 28 (account fee) | 12 | 1,181 |
| March total | N/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
| Detail | Amount |
|---|---|
| Cash book balance | 1,200 |
| Add: Outstanding deposits | 0 |
| Subtotal | 1,200 |
| 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
| Date | Detail | Amount |
|---|---|---|
| Mar. 3 | Email transfer fee | 1 |
| Mar. 7 | Email transfer fee | 1 |
| Mar. 19 | Email transfer fee | 1 |
| Mar. 20 | Email transfer fee | 1 |
| Mar. 22 | Email transfer fee | 1 |
| Mar. 25 | Email transfer fee | 1 |
| Mar. 27 | Email transfer fee | 1 |
| Mar. 28 | Checking account fee | 12 |
| – | Total | $19 |
Outstanding Deposits
| Date | Detail | Amount |
|---|---|---|
| None | N/A | 0 |
| – | Total | $0 |
Reconciliation
| Detail | Amount |
|---|---|
| Cash book balance | 1,200 |
| Add: Outstanding deposits | 0 |
| Subtotal | 1,200 |
| 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
