What Is a Bank Reconciliation Statement?
A bank reconciliation statement is a summary of banking and business activity that reconciles an entity’s bank account with its financial records. The statement outlines the deposits, withdrawals, and other activities affecting a bank account for a specific period. A bank reconciliation statement is a useful financial internal control tool used to thwart fraud.
Bank Reconciliation Statement
Understanding the Bank Reconciliation Statement
Bank reconciliation statements ensure payments have been processed and cash collections have been deposited into the bank. The reconciliation statement helps identify differences between the bank balance and book balance, in order to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once a month.
- A bank reconciliation statement summarizes banking and business activity, reconciling an entity’s bank account with its financial records.
- Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account.
- All fees charged on an account by a bank must be accounted for on a reconciliation statement.
- After all adjustments, the balance on a bank reconciliation statement should equal the ending balance of the bank account.
Required Information to Create Bank Reconciliation Statement
Completing a bank reconciliation statement requires using both the current and the previous month's statements, including the closing balance of the account. The accountant typically prepares the bank reconciliation statement using all transactions through the previous day, as transactions may still be occurring on the actual statement date.
All deposits and withdrawals posted to an account must be used to prepare a reconciliation statement.
Bank Reconciling Statement
The accountant adjusts the ending balance of the bank statement to reflect outstanding checks or withdrawals. These are transactions in which payment is en route but the cash has not yet been accepted by the recipient. An example is a check mailed on Oct. 30. When preparing the Oct. 31 bank reconciliation statement, the check mailed the previous day is unlikely to have been cashed, so the accountant deducts the amount from the bank balance. There may also be collected payments that have not yet been processed by the bank, which requires a positive adjustment.
Adjusting Balance per Books
The balance of the cash account in an entity's financial records may require adjusting as well. For instance, a bank may charge a fee for having the account open. The bank typically withdraws and processes the fees automatically from the bank account. Therefore, when preparing a bank reconciliation statement, any fees taken from the account must be accounted for by preparing a journal entry.
Another item that requires an adjustment is interest earned. Interest is automatically deposited into a bank account after a certain period of time. Thus, the accountant may need to prepare an entry that increases the cash currently shown in the financial records. After all, adjustments are made to the books, the balance should equal the ending balance of the bank account. If the figures are equal, a successful bank reconciliation statement has been prepared.