What is Bank Reconciliation?

A bank reconciliation statement is a document that matches the cash balance on

a company’s sheet to the corresponding amount on its bank statement.
Reconciling the two accounts helps determine if accounting changes are ne0eded.
Bank reconciliations are completed at regular intervals to ensure that the
company’s cash records are correct. They also help detect fraud and any cash
manipulations.

Reasons for Difference Between Bank Statement and Company’s Accounting

Record
When banks send companies, a bank statement that contains the
company’s beginning cash balance, transactions during the period, and ending cash
balance, almost always, the bank’s ending cash balance and the company’s ending
cash balance will never be the same.
Some reasons for the difference are:
Deposits in transit: Cash and checks that have been received and recorded but
have not yet been recorded on the bank statement.
Outstanding checks: Checks that have been issued by the company to creditors
but the payments have not yet been processed.
Bank service fees: Banks deduct charges for services they provide to customers
but these amounts are usually not noticeable.
Interest income: Banks pay interest on some bank accounts.
Not sufficient funds (NSF) checks: When a customer deposits a check into an
account but the account of the issuer of the check has insufficient amount to pay
the check, the bank reduces from the customer’s account the check that was
previously credited. The check is then returned to the depositor as an NSF check.
 
Bank Reconciliation Procedure:
On the bank statement, compare the company’s list of issued checks and deposits
to the checks shown on the statement to identify uncleared checks and deposits in
transit.
Using the cash balance shown on the bank statement, add back any deposits in
transit.
Deduct any outstanding checks.
This will provide the adjusted bank cash balance.
Next, use the company’s ending cash balance, add any interest earned and notes
receivable amount.
Deduct any bank service fees, penalties, and NSF checks. This will arrive at the
adjusted company cash balance.
After reconciliation, the adjusted bank balance should match with the company’s
ending adjusted cash balance.
 
Example
XYZ Company is closing its book and must prepare a bank reconciliation for the
following items:
Bank statement contains an ending balance of $300,000 on February 28, 2018,
whereas the company’s ledger shows an ending balance of $260,900
Bank statement contains a $100 service charge for operating the account
Bank statement contains interest income of $20
XYZ issued checks of $50,000 that have not yet been cleared by the bank
XYZ deposited $20,000 but this did not appear on the bank statement
A check for the amount of $470 issued to the office supplier was misreported in the
cash payments journal as $370.
A note receivable of $9,800 was collected by the bank.
A check of $520 deposited by the company has been charged back as NSF.
 
  Amount Adjustment to Books

Ending Bank Balance $300,000

Deduct: Uncleared cheques – $50,000 None

Add: Deposit in transit + $20,000 None

Adjusted Bank Balance $270,000

Ending Book Balance $260,900

   Amount Adjustment to Books

Deduct: Service charge – $100 Debit expense, credit cash

Add: Interest income + $20 Debit cash, credit interest income

Deduct: Error on check – $100 Debit expense, credit cash

Add: Note receivable + $9,800 Debit cash, credit notes receivabl

Deduct: NSF check – $520 Debt accounts receivable, credit c

Adjusted Book Balance $270,000

December 04, 2018

Bank Reconciliation Overview

A bank reconciliation is the process of matching the balances in an entity's accounting

records for a cash account to the corresponding information on a bank statement . The goal
of this process is to ascertain the differences between the two, and to book changes to the
accounting records as appropriate. The information on the bank statement is the bank's
record of all transactions impacting the entity's bank account during the past month.

A bank reconciliation should be completed at regular intervals for all bank accounts, to
ensure that a company's cash records are correct. Otherwise, it may find that cash
balances are much lower than expected, resulting in bounced checks or overdraft fees.
A bank reconciliation will also detect some types of fraud after the fact; this
information can be used to design better controls over the receipt and payment of cash.

It is extremely unlikely that a company's ending cash balance and the bank's ending cash
balance will be identical, since there are probably multiple payments and deposits in transit
at all times, as well as bank service fees (for accepting checks , recording deposits, and so
forth), penalties (usually for overdrafts), and not sufficient funds deposits that the company
has not yet recorded.
 The essential process flow for a bank reconciliation is to start with the bank's ending cash
balance, add to it any deposits in transit from the company to the bank, subtract any checks
that have not yet cleared the bank, and either add or deduct any other items. Then, go to the
company's ending cash balance and deduct from it any bank service fees, NSF checks and
penalties, and add to it any interest earned . At the end of this process, the adjusted bank
balance should equal the company's ending adjusted cash balance.

Bank Reconciliation Terminology

The key terms to be aware of when dealing with a bank reconciliation are:

 Deposit in transit. Cash and/or checks that have been received and recorded by an
entity, but which have not yet been recorded in the records of the bank where the entity
deposits the funds. If this occurs at month-end, the deposit will not appear in the bank
statement, and so becomes a reconciling item in the bank reconciliation. A deposit in transit
occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity
mails the deposit to the bank (in which case a mail float of several days can cause a delay), or
the entity has not yet sent the deposit to the bank at all.

 Outstanding check. A check payment that has been recorded by the issuing entity,
but which has not yet cleared its bank account as a deduction from cash. If it has not yet
cleared the bank by the end of the month, it does not appear on the month-end bank statement,
and so is a reconciling item in the month-end bank reconciliation.

 NSF check. A check that was not honored by the bank of the entity issuing the
check, on the grounds that the entity's bank account does not contain sufficient funds. NSF is
an acronym for "not sufficient funds." The entity attempting to cash an NSF check may be
charged a processing fee by its bank. The entity issuing an NSF check will certainly be
charged a fee by its bank.

Bank Reconciliation Procedure

The following bank reconciliation procedure assumes that you are creating the bank
reconciliation in an accounting software package, which makes the reconciliation process
easier:
1. Enter the bank reconciliation software module. A listing of uncleared checks and
uncleared deposits will appear.

2. Check off in the bank reconciliation module all checks that are listed on the bank
statement as having cleared the bank.

3. Check off in the bank reconciliation module all deposits that are listed on the bank
statement as having cleared the bank.

4. Enter as expenses all bank charges appearing on the bank statement, and which have
not already been recorded in the company's records.

5. Enter the ending balance on the bank statement. If the book and bank balances
match, then post all changes recorded in the bank reconciliation and close the module. If the
balances do not match, then continue reviewing the bank reconciliation for additional
reconciling items. Look for the following items:

 Checks recorded in the bank records at a different amount from what is recorded in
the company's records.

 Deposits recorded in the bank records at a different amount from what is recorded in
the company's records.

 Checks recorded in the bank records that are not recorded at all in the company's
records.

 Deposits recorded in the bank records that are not recorded at all in the company's
records.

 Inbound wire transfers from which a lifting fee has been extracted.

Bank Reconciliation Problems

There are several problems that continually arise as part of the bank reconciliation, and
which you should be aware of. They are:

 Uncleared checks that continue to not be presented. There will be a residual number
of checks that either are not presented to the bank for payment for a long time, or which are
never presented for payment. In the short term, you should treat them in the same manner as
any other uncleared checks - just keep them in the uncleared checks listing in your accounting
 software, so they will be an ongoing reconciling item. In the long term, you should contact the
payee to see if they ever received the check; you will likely need to void the old check and
issue them a new one.

 Checks clear the bank after having been voided. As noted in the preceding special
issue, if a check remains uncleared for a long time, you will probably void the old check and
issue a replacement check. But what if the payee then cashes the original check? If you voided
it with the bank, the bank should reject the check when it is presented. If you did not void it
with the bank, then you must record the check with a credit to the cash account and a debit to
indicate the reason for the payment (such as an expense account, or an increase in a cash
account or decrease in a liability account). If the payee has not yet cashed the replacement
check, you should void it with the bank at once to avoid a double payment. Otherwise, you
will need to pursue repayment of the second check with the payee.

 Deposited checks are returned. There are cases where the bank will refuse to deposit
a check, usually because it is drawn on a bank account located in another country. In this case,
you must reverse the original entry related to that deposit, which will be a credit to the cash
account to reduce the cash balance, with a corresponding debit (increase) in the accounts
receivable account.

Another possibility that may be causing problems is that the dates covered by the bank
statement have changed, so that some items are included or excluded. This situation should
only arise if someone at the company requested the bank to alter the closing date for the
company's bank account.

Bank Reconciliation Example

ABC International is closing its books for the month ended April 30. ABC's controller must
prepare a bank reconciliation based on the following issues:

1. The bank statement contains an ending bank balance of $320,000.

2. The bank statement contains a $200 check printing charge for new checks that the
company ordered.

3. The bank statement contains a $150 service charge for operating the bank account.
4. The bank statement rejects a deposit of $500 due to not sufficient funds, and charges
the company a $10 fee associated with the rejection.

5. The bank statement contains interest income of $30.

6. ABC issued $80,000 of checks that have not yet cleared the bank.

7. ABC deposited $25,000 of checks at month-end that were not deposited in time to
appear on the bank statement.

The controller creates the following reconciliation:

Item # Adjustment to Books

Bank balance $320,000 1  

- Check printing charge -200 2 Debit expense, credit cash

- Service charge -150 3 Debit expense, credit cash

- NSF fee -10 4 Debit expense, credit cash

- NSF deposit rejected - 500 4 Debit receivable, credit cash

+ Interest income + 30 5 Debit cash, credit interest income

- Uncleared checks - 80,000 6 None

+ Deposits in transit + 25,000 7 None

Book balance   $264,170  

Bank Reconciliation Statement

When the bank reconciliation process is complete, you should be able to print a report
through your accounting software that shows the bank and book balances, the identified
differences between the two (mostly uncleared checks), and any remaining unreconciled
difference. Retain a copy of this report for each month. The auditors will want to see it as
part of their year-end audit . The format of the report will vary by software package; a
simplistic layout is:

Bank Reconciliation Statement  

For Month Ended March 31, 20X3 Notes 

Bank balance $850,000  

Less: Checks outstanding -225,000 See detail

Add: Deposits in transit +100,000 See detail

+/- Other adjustments 0  

Book balance $725,000  

Unreconciled difference $0  

Bank Reconciliation Record Keeping

If you complete the bank reconciliation at month-end, then print the bank reconciliation report
and file it in the monthly journal entries binder. This gives the auditors ready access to the
information if they want to examine the reconciliations at a later date.

How Do You Reconcile a Bank Statement?

To reconcile a bank statement, the account balance as reported by the bank is compared to the general
ledger of a business.

Businesses maintain a cashbook to record both bank transactions as well as cash transactions. The cash
column in the cash book shows the available cash while the bank column shows the cash at the bank.
Similarly, the bank too keeps an account for every customer. In the bank books, the deposits are
recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the
account statement to its customers every month or at regular intervals.

Sometimes these balances do not match. The business needs to identify the reasons for the discrepancy
and reconcile the differences. This is done to confirm every item is accounted for and the ending balances
match. To do this, a  reconciliation statement  known as the bank reconciliation statement is prepared.

Bank Reconciliation: A Step-by-Step Guide

You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes
the cash and other deposits made into the checking account of the business. The statement also includes
bank charges such as for account servicing fees.

Once you’ve received it, follow these steps to reconcile a bank statement:

1. COMPARE THE DEPOSITS

Match the deposits in the business records with those in the bank statement. Compare the amount of
each deposit recorded in the debit side of the bank column of the cashbook with credit side of the bank
statement and credit side of the bank column with the debit side of the bank statement. Mark the items
appearing in both the records.

2. ADJUST THE BANK STATEMENTS

Adjust the balance on the bank statements to the corrected balance. For doing this, you must add
deposits in transit, deduct outstanding checks and add/deduct bank errors.

Deposits in transit are amounts that are received and recorded by the business but are not yet recorded
by the bank. They must be added to the bank statement.

Outstanding checks are those that have been written and recorded in cash account of the business but
have not yet cleared the bank account. They need to be deducted from the bank balance. This often
happens when the checks are written in the last few days of the month.

Bank errors are mistakes made by the bank while creating the bank statement. Common errors include
entering an incorrect amount or omitting an amount from the bank statement. Compare the cash
account’s general ledger to the bank statement to spot the errors.

3. ADJUST THE CASH ACCOUNT

The next step is to adjust the cash balance in the business account.

Adjust the cash balances in the business account by adding interest or deducting monthly charges and
overdraft fees. 

To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting.

 Bank charges are service charges and fees deducted for the bank’s processing of the business’
checking account activity. This can include monthly charges or charges from overdrawing your
 account. They must be deducted from your cash account. If you’ve earned any interest on your
bank account balance, they must be added to the cash account.

 An NSF (not sufficient funds) check is a check that has not been honored by the bank due to
insufficient funds in the entity’s bank accounts. This means that the check amount has not been
deposited in your bank account and hence needs to be deducted from your cash account records.

 Errors in the cash account result in an incorrect amount being entered or an amount being
omitted from the records. The correction of the error will increase or decrease the cash account
in the books.

4. COMPARE THE BALANCES

After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the
same. If they are still not equal, you will have to repeat the process of reconciliation again.

Once the balances are equal, businesses need to prepare journal entries for the adjustments to the
balance per books.

What Is the Purpose of Bank Reconciliation?

The bank reconciliation process offers several advantages including:

 Detecting errors such as double payments, missed payments, calculation errors etc.

 Tracking and adding bank fees and penalties in the books

 Spot fraudulent transactions and theft

 Keeping track of accounts payable and receivables of the business

https://www.freshbooks.com/hub/accounting/do-bank-reconciliation

  What is Bank Reconciliation?

A bank reconciliation statement is a document that matches the cash balance on a

company’s balance sheet to the corresponding amount on its bank statement.
Reconciling the two accounts helps determine if accounting changes are needed. Bank
reconciliations are completed at regular intervals to ensure that the company’s cash records are
correct. They also help detect fraud and any cash manipulations.
 

Reasons for Difference Between Bank Statement and Company’s Accounting Record
When banks send companies a bank statement that contains the company’s beginning cash
balance, transactions during the period, and ending cash balance, almost always the bank’s
ending cash balance and the company’s ending cash balance are not the same.
Some reasons for the difference are:
  Deposits in transit: Cash and checks that have been received and recorded by the company but
have not yet been recorded on the bank statement.

 Outstanding checks: Checks that have been issued by the company to creditors but the
payments have not yet been processed.

 Bank  service fees: Banks deduct charges for services they provide to customers but these
amounts are usually relatively small.

 Interest income: Banks pay interest on some bank accounts.

 Not sufficient funds (NSF) checks: When a customer deposits a check into an account but the
account of the issuer of the check has an insufficient amount to pay the check, the bank deducts
from the customer’s account the check that was previously credited. The check is then returned
to the depositor as an NSF check.

Bank Reconciliation Procedure:

1. On the bank statement, compare the company’s list of issued checks and deposits to the checks
shown on the statement to identify uncleared checks and deposits in transit.

2. Using the cash balance shown on the bank statement, add back any deposits in transit.

3. Deduct any outstanding checks.

4. This will provide the adjusted bank cash balance.

5. Next, use the company’s ending cash balance, add any interest earned and notes receivable
amount.

6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company
cash balance.

7. After reconciliation, the adjusted bank balance should match with the company’s ending
adjusted cash balance

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