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.
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:
- 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.