Template | Examples | Step-by-Step Process | Top Tips for reconciling bank statements
|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:
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:
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.
The bank reconciliation procedure contains 4 steps:
|Bank Reconciliation in 4 Steps|
|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 >>>
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:
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.
Cash and checks received and recorded by a business but not yet credited to its bank statement. For example:
Deposits in transit are also known as:
Subtract any drawn checks that have been written to make a payment but not yet cleared by the bank.
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.
Debits and credits are reversed in bank statements–compared to business accounting records–because the bank is showing the transactions from its perspective.
|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|
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.
Interest earned on a bank account balance.
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.
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.
NSF (Not Sufficient Funds) checks that have been dishonored by a bank due to insufficient funds in the issuer’s bank account.
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.
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.
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:
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:
All of the bank reconciliation adjustments and corrections are captured in a bank reconciliation statement >>>
The 4 most common formats of a bank reconciliation statement are shown below:
|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|
|Bank Reconciliation Statement at [Date]|
|Balance per Bank Statement||$X/($X)|
|Other Adjustments to Bank Statement||$X/(X)|
|Balance per Cash Book (Revised)||$X/(X)|
|Bank Reconciliation Statement at [Date]|
|Cash Book||Debit ($)||Credit ($)||Ending Cash Book Balance||X||(X)|
|Add: [Debit Cash account]|
|Less: [Credit Cash account]|
|Add / Less: [Debit or Credit Cash account as required]|
|Other Adjustments to Cash Book||X||(X)|
|Corrected Cash Book Balance [= Corrected Bank Balance]||X||(X)|
|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.
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:
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.
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.
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 $2,000.
Draft the required bank reconciliation adjusting journal entries for the cash account in the company’s general ledger.
|Company A: Bank Reconciliation Statement as of 30 September 20XX - Cash Book Adjustments|
|Cash Book Adjusting Entries||Debit ($)||Credit ($)||Ending Cash Book Balance – Unadjusted [before bank rec]||1,500|
|Add: [Debit Cash account]|
|Less: [Credit Cash account]|
|Total Bank Reconciliation Adjustments||2,465||(1,965)|
|Revised Cash Book Balance – Adjusted [after bank rec]||2,000|
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.
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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