Bank Reconciliation

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What is a Bank Reconciliation?

A bank reconciliation statement is a document that compares the cash balance on a company’s balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps identify whether 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.

Bank Reconciliation theme - Calculator and pen on top of balance sheet

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, the bank’s ending cash balance and the company’s ending cash balance are almost always different. Some reasons for the difference are:

Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates.

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.

Example

XYZ Company is closing its books and must prepare a bank reconciliation for the following items:

AmountAdjustment to Books
Ending Bank Balance$300,000
Deduct: Uncleared cheques– $50,000None
Add: Deposit in transit+ $20,000None
Adjusted Bank Balance$270,000
Ending Book Balance$260,900
Deduct: Service charge– $100Debit expense, credit cash
Add: Interest income+ $20Debit cash, credit interest income
Deduct: Error on check– $100Debit expense, credit cash
Add: Note receivable+ $9,800Debit cash, credit notes receivable
Deduct: NSF check– $520Debt accounts receivable, credit cash
Adjusted Book Balance$270,000

Bank Reconciliation Statement

After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month. This statement is used by auditors to perform the company’s year-end auditing.

Example - Bank Reconciliation Statement

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