How To Do Bank Reconciliation in 4 Steps [Example+Template]

Template | Examples | Step-by-Step Process | Top Tips for reconciling bank statements

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Contents

What is a Bank Reconciliation?

Bank Reconciliation
Bank Statement Company Books
External records Internal records
Bank’s record of transactions in a company’s bank account Company’s internal accounting records of transactions in its bank account
Document received from a bank or online banking information Company’s cash book or general ledger cash account
The reconciled cash balance is reported in the company’s financial statements.

Theoretically, the transactions listed on a business’ bank statement should be identical to those that appear in the accounting records of the business, with matching ending cash balances on any given day.

In reality, though, a company’s bank statement and in its cash book will rarely agree because of:

  1. Timing differences
  2. Omissions
  3. Errors

This is why companies prepare bank reconciliations, where they match bank statement transactions to the corresponding entries in their accounting records, determining the differences between the two in order to:

  1. Resolve any discrepancies
  2. Post journal entries to adjust the cash account so that the general ledger is accurate and complete and the correct cash balance can be reported in a company’s financials
  3. Identify any potential fraudulent transactions

After all adjustments, the ending balance of the cash book should equal the bank statement.

The reconciled and adjusted cash book balance is reported in a company’s financial statements.

Bank reconciliation is often referred to simply as bank rec.

4 Simple Steps: How To Do a Bank Reconciliation?

The bank reconciliation procedure contains 4 steps:

Bank Reconciliation in 4 Steps
Step Adjustment
1. Timing Differences in Bank Statement Identify items recorded in company books but not in bank statement
2. Omissions in Company Books Identify items recorded in bank statement but not in company books
3. Errors in Bank Statement and Company Books Identify errors in bank statement or company books
4. Adjusting Journal Entries in Company Books Correct any omissions and errors in the company books

Let’s take a closer look at each of these steps in a bank reconciliation process >>>

Step 1: Adjust Bank Statement for Timing Differences

Systematically compare a company’s list of issued checks and deposits to those shown on a bank statement in order to identify any outstanding checks and deposits:

Additions to a bank statement:

Add back any receipts for deposits in transit from a company to the bank, which have been paid in but not yet processed by the bank.

Deposits in transit

Cash and checks received and recorded by a business but not yet credited to its bank statement. For example:

  • A day’s cash receipts recorded in a depositor’s books in one period but recorded as a deposit by the bank in the following period.
  • Checks received by a business, paid into a bank and debited in a cash book, which have not yet been cleared by the bank and added to the depositor’s account.

Deposits in transit are also known as:

  • Deposits credited after date
  • Outstanding / Uncredited / Uncleared deposits
  • Outstanding / Uncredited / Uncleared lodgements

Deductions from a bank statement:

Subtract any drawn checks that have been written to make a payment but not yet cleared by the bank.

Outstanding checks

Checks that have been issued by a business to creditors and credited in a cash book–but the payments have not yet been processed by a bank and so do not appear on a bank statement.

  • Unpresented checks: a business makes a payment by a check but the payee has not yet presented it to a bank.
  • Uncleared checks: a business makes a payment by a check, the payee banks it, but it takes some time for a bank to clear the check and deduct the money from the payer’s account.

Tip:

Debits and credits are reversed in bank statements–compared to business accounting records–because the bank is showing the transactions from its perspective.

  • If a depositor has a positive bank balance, the bank statement shows the deposit as a credit balance because it has a liability to pay it back to the client.
  • If a depositor’s account is overdrawn, the bank statement displays the overdraft as a debit balance because the client has a liability to repay it to the bank.
Bank Account: Debits | Credits
Depositor’s Bank Account Bank Statement Company Records
Positive cash balance Credit - the bank owes the deposited cash to the client Debit - the cash balance in the bank account is an asset to the depositor
Negative cash balance (overdrawn) Debit - the overdraft balance in the account is an asset to the bank Credit - the client owes the overdrawn funds to the bank

Step 2: Adjust Cash Account for Unrecorded Items

Some transactions first appear in a bank statement before they are entered into the cash book simply because the business is unaware of their existence until it receives the bank statement.

Additions to a cash account:

Interest income

Interest earned on a bank account balance.

Direct Receipts

Credit memos for funds received directly into a bank account and not recorded in the cash book, such as wire transfers from another company bank account, direct debits, standing orders, dividends, or notes collected on behalf the depositor by the bank.

Deductions from a cash account:

Bank charges and service fees

Banks deduct fees and charges for services they provide to customers, such as monthly maintenance of a bank account’s activity, accepting checks and deposits, interest on overdrafts, late payment penalties, or safe-deposit box rent.

Rejected customer checks

NSF (Not Sufficient Funds) checks that have been dishonored by a bank due to insufficient funds in the issuer’s bank account.

Direct Payments

Debit memos for funds deducted directly from a bank account and not entered into a cash book, such as standing orders, direct debits, notes paid by the bank on behalf of the depositor, or money transfers to other bank accounts that belong to the company.

Step 3: Adjust Cash Account and Bank Statement for Errors

Errors could include omission, entering the wrong amount, or recording an item to the incorrect account.

Errors in calculation or recording of payments are more likely made by business staff than by a bank. Nevertheless, while bank errors are very rare, it is still a possibility.

Step 4: Correct Cash Account in General Ledger

The bank statement is reconciled when the adjusted cash balance as per bank equals the adjusted cash balance as per company books.

Once the true cash balance is calculated, the company will post journal entries to the accounting general ledger for all items identified during the reconciliation in order to adjust the original ending cash account balance to the correct cash balance.

The adjusting cash account journal entries will contain:

  1. Unrecorded items in cash book – transactions and events which affect cash but have not been previously recorded in the cash book, such as interest earned, bank service fees, or dishonoured checks (Step 2)
  2. Errors in cash book (Step 3)

Consequently, the company’s general ledger cash account and its balance sheet will reflect the reconciled, adjusted, correct and true cash balance.

Here’s a summary table of all bank reconciliation adjustments >>>

Bank Reconciliation Adjustments
Bank Statement Company Records
Timing differences: In books but not in bank Omissions: In bank but not in books
+ Deposits in Transit + Interest Earned (DR Cash)
+ Bank Errors + Payments In (DR Cash)
+ Book Errors (DR Cash)
- Outstanding Checks - Bank Fees (CR Cash)
- Bank Errors - Dishonored Checks (CR Cash)
- Payments Out (CR Cash)
- Book Errors (CR Cash)
Adjusted Bank balance = Adjusted Book balance (reported in company financials)

Notice that there are no journal entries posted for the bank statement adjustments (Step 1) because those are only used in the reconciliation process to calculate at the “correct” adjusted cash balance.

In other words:

  • On the cash book side of the bank rec, adjusting journal entries need to be posted into the general ledger cash account for each of the reconciling items.
  • On the bank statement side of the bank rec, there is no need to record the adjustments form the bank reconciliation (other than contacting the bank in case of any–very unlikely–bank errors).

All of the bank reconciliation adjustments and corrections are captured in a bank reconciliation statement >>>

Template: 4 Bank Reconciliation Statement Examples

The 4 most common formats of a bank reconciliation statement are shown below:

Example #1 of Bank Reconciliation Statement Template

Bank Reconciliation Statement as at [Date]
Ending Cash Balance per Bank Statement Ending Cash Balance per Company Books
+ Outstanding Deposits Incoming + Interest Income
+ Bank Errors + Payments Incoming
+ Book Errors
- Outstanding Checks Outgoing - Bank Fees
- Bank Errors - Rejected Checks Incoming
- Payments Outgoing
- Book Errors
= Revised Bank Balance = Revised Book Balance

Example #2 of Bank Reconciliation Statement Template

Bank Reconciliation Statement at [Date]
Balance per Bank Statement $X/($X)
Outstanding Deposits $X
Outstanding Checks ($X)
Other Adjustments to Bank Statement $X/(X)
Balance per Cash Book (Revised) $X/(X)

Example #3 of Bank Reconciliation Statement Template

Bank Reconciliation Statement at [Date]
Cash Book Debit ($) Credit ($)
Ending Cash Book Balance X (X)
Add: [Debit Cash account]
Interest Income X
Payments In X
Less: [Credit Cash account]
Bank Fees (X)
Dishonored Checks (X)
Payments Out (X)
Add / Less: [Debit or Credit Cash account as required]
Book Errors X (X)
Other Adjustments to Cash Book X (X)
Corrected Cash Book Balance [= Corrected Bank Balance] X (X)

Example #4 of Bank Reconciliation Statement Template

Bank Reconciliation Statement as of [Date] $
Unadjusted Ending Balance per Bank Statement X/(X)
Add: Deposits in Transit X
Deduct: Uncleared Checks (X)
Add/Deduct: Other Bank Adjustments X/(X)
Add/Deduct: Bank Errors X/(X)
Adjusted Bank Balance X/(X)
Unadjusted Ending Balance per Company Records X/(X)
Add: Bank Interest X
Add: Direct Receipts X
Deduct: Bank Charges & Fees (X)
Deduct: Rejected Checks (X)
Deduct: Direct Payments (X)
Add/Deduct: Other Book Adjustments X/(X)
Add/Deduct: Book Errors X/(X)
Adjusted Book Balance X/(X)

While the bank reconciliation statement can have many different formats, they all have the same goal of identifying and explaining the discrepancies between the cash balance on a bank statement and in a company’s books so that the company can make the appropriate changes to its accounting records.

The final balance on the bank reconciliation statement, after all corrections and adjustments, is the actual “true” cash balance reported in the company’s balance sheet.

Example: Practical Exercise with Solution

As of 30 September 20XX, the ending debit cash balance in the accounting records of Company A was $1,500, whereas its bank account showed an overdraft of $500.

After systematically going through the bank statement items and cash book entries, the following 11 discrepancies were found:

1. Bank Statement - Timing Differences

The company’s accounting records contain the following 2 items that are not on the bank statement:

1.1.  Company A paid $3,750 worth of checks into its bank account and debited its cash book accordingly, but the bank has not yet credited the funds to the depositor’s account.

1.2.  Company A issued $1,250 of checks to pay its creditors but they have not yet been cleared by the bank and deducted from the payer’s account.

2. Accounting Records - Omissions & Errors

The bank statement contains the following 9 items that are not in the company’s accounting records:

2.1.  Interest earned by the depositor and paid by the bank of $55.

2.2.  A note receivable of $1,075 collected by the bank.

2.3.  Dividends amounting to $1,335 received directly from an investment account. 

2.4.  Monthly bank service charge of $15 for operating the bank account.

2.5.  Overdraft fee of $100 as a penalty for a negative bank balance.

2.6.  Customer check of $1,250 deposited by Company A has been returned and charged back as NSF (not sufficient funds).

2.7.  NSF fee for the rejected dishonored check of $10 charged by the bank.

2.8.  Direct debit payments of $500 automatically deducted from the account.

2.9.  Error in a payment to a creditor, which was correctly processed by a bank as $2,435 but recorded in the cash book as $2,345.

Task #1: Bank Reconciliation Statement

Prepare a bank reconciliation statement for Company A as of 30 September 20XX.

Company A: Bank Reconciliation Statement as of 30 September 20XX
Unadjusted Ending Cash Balance per Bank Statement ($500)
+ Deposits in Transit [1.1.] $3,750
- Uncleared Checks [1.2.] ($1,250)
Revised Bank Balance $2,000
Unadjusted Ending Cash Balance per Company Records $1,500
+ Bank Interest [2.1.] $55
+ Direct Receipts [2.2. + 2.3.] $1,075 + $1,335 = $2,410
- Bank Charges [2.4. + 2.5. + 2.7.] ($15 + $100 +$10 = $125)
- Rejected Checks [2.6.] ($1,250)
- Direct Payments [2.8.] ($500)
- Book Errors [2.9.] ($2,435 - $2,345 = $90)
Revised Book Balance $2,000

After all reconciliation adjustments, the final correct cash balance captured in the company accounting records and on its balance sheet as at 30 September 20XX was $2,000.

Task #2: Cash Book Journal Entries

Draft the required bank reconciliation adjusting journal entries for the cash account in the company’s general ledger.

Company A: Bank Reconciliation Statement as of 30 September 20XX - Cash Book Adjustments
Cash Book Adjusting Entries Debit ($) Credit ($)
Ending Cash Book Balance – Unadjusted [before bank rec] 1,500
Add: [Debit Cash account]
Interest Income 55
Payments In 2,410
Less: [Credit Cash account]
Bank Fees (125)
Dishonored Checks (1,250)
Payments Out (500)
Book Errors (90)
Total Bank Reconciliation Adjustments 2,465 (1,965)
Revised Cash Book Balance – Adjusted [after bank rec] 2,000

Who should perform bank reconciliations?

A bank reconciliation should be performed by an independent person who is not otherwise involved in the cash cycle so that segregation of duties is established in order to prevent fraud as an important part of a company’s internal controls over its cash assets.

How often should you reconcile bank statements?

Bank reconciliations should be performed at least at the end of each month, or more often in a business with a large number of transactions. More frequent reconciliations, weekly or daily, increase efficiency as there are fewer transactions to process at any one time and issues are detected sooner.

In the past, monthly reconciliations were the norm because banks used to issue paper statements on monthly basis.

Today, online banking and accounting software offer real-time feeds and automated transaction matching. As a result, bank transactions can be automatically imported into an accounting software, where one is able to categorize and match a large number of transactions with one click of a button. This significantly reduces the effort that goes into the reconciliation process and enables businesses to verify their cash balances anytime throughout the month.

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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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