Bank Reconciliation Statement

Bank reconciliation statement refers to the process of reconciling the balance per bank with the balance per books or making them consistent with one another. These two balances are seldom the same owing to two main reasons: (1) Time lags that prevent the two parties (the company and the bank) from recording the same transaction in the same period and (2) errors in recording the transactions by either party.

The process of reconciling the bank balance as per books with the balance as per bank has four main steps. Firstly, deposits in transit (the deposits recorded by the depositor and not the bank) should be added to the bank balance. Secondly, outstanding checks should be deducted from the bank balance.  They are issued checks recorded by the company but have not yet been paid by the bank. Third step is to ensure that all errors made by the depositor should be treated as reconciling items in determining the balance as per books whereas all errors made by the bank should be treated as reconciling items in determining the bank balance. Lastly, bank memorandum should be matched with the depositor’s records. For example, a company will deduct a $3 debit memorandum for bank service charges from the balance appearing in the company’s books.

Importance of Bank Reconciliation

In this section we will discuss the reasons which propel businesses to prepare bank reconciliations:

To see the Actual Position of your Business: When you look at your records, you want them to reflect your business’s actual position. If balance appearing in your bank and credit card statements don’t match up with the balances appearing in your accounting ledgers then you could be in a position where you may end up issuing cheques of amounts that are in excess of the funds that you actually have in your bank accounts or may be your holding onto money that could be invested in your business. This can also help you in identifying any interest income or bank service charges that may be making your book balance inaccurate.

To Track Cashflow: Managing cash flow is an integral element of managing and running the operations of a business. Bank reconciliation helps you in understanding the difference between when money enters your business and when it enters in your bank accounts, and therefore plan how you collect and spend the money accordingly.

To Detect Fraud: Reconciling your banks won’t stop errors or fraud, but it will help you in knowing what is actually happening in your business.

For instance, your bookkeeper may issue a cheque to a supplier of an amount that is in excess of the amount which you owe to the supplier. You wouldn’t know this until your bank charges you for this transaction. The discrepancy would show up when you’ll reconcile balances appearing in your bank ledgers with those appearing in your bank statements.

Reconciling bank statements is very important if you don’t want your staff to keeping on making errors or worse deceive in any way possible.

To Identify Errors Made by Banks: It’s also possible for banks to make mistakes. Bank reconciliation helps you in identifying instances where the bank has either not recorded a transaction or has recorded transaction by the wrong amount.

To Keep Track of your Accounts Receivable: If you are using the accrual accounting then you may debit your bank account and credit your accounts receivable when you receive cheque from your client irrespective of whether it has been presented in your bank or not. A situation can arise in which you may realize that the cheque received from the client was never presented in bank for deposit. Such instances/ situations can be identified if you reconcile your banks on a regular basis. Bank reconciliations help you in ensuring that your accounts receivable never get out of control.

How Often a Bank Reconciliation Should be Performed?  

For the most part, how often you reconcile your bank balances will depend on the nature and volume of your business transactions.

Businesses that have money coming in and going out of their accounts on multiple times in a single day, will want to reconcile their bank balances on a daily basis.

It’s important to keep your balances up to date. The more frequently you reconcile balances appearing in your banks, the easier it is each time.

It’s best to have a regular schedule. Decide on a schedule for reconciling your bank statements and stick to it. This will help you in ensuring that your un-reconciled bank statements don’t pile up into an intimidating and time-consuming task. And it will keep you in tune with your business’s cash flow.