Bank Reconciliation Statement

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.

Key Takeaways

  • 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.
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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, to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once per month.

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Software that automates bank reconciliation can help reduce errors associated with manual processing.

Requirements for a 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.

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.

Benefits of a Bank Reconciliation Statement

Bank reconciliation statements are effective tools for detecting fraud. For example, if a check is altered, resulting in a payment larger than anticipated, measures can be taken to interrupt the unscrupulous activity.

Bank reconciliation statements also help identify errors that could adversely financial reporting. Financial statements show the health of a company for a specific period or point in time and are often used to calculate profitability. Accurate financial statements allow investors to make informed decisions and give companies clear pictures of their cash flows.

Reconciling bank statements helps to identify errors that affect tax reporting. Without reconciling, companies may pay too much or too little in taxes.

Example of a Bank Reconciliation Statement

Bank reconciliation statements compare transactions from financial records to those on a bank statement. Where there are discrepancies, companies are able to identify the source of errors and correct them.

For example, ABC Holding Co. recorded an ending balance of $480,000 on its records. However, its bank statement shows an ending balance of $520,000. After careful investigation, ABC Holding Co. found that a vendor's check for $20,000 had not been presented to the bank, and a $20,000 deposit made by a client was inadvertently omitted from the company's records. Therefore, ABC Holding Co. adjusted it's records, noting the check as outstanding and adding the missing deposit.

What Are the Steps in a Bank Reconciliation?

The first step in reconciling a bank statement is to compare financial record activities to bank statement activities. For any bank errors, unaccounted for deposits, and unpresented checks, make adjustments to the bank statement balance. Some personal or business accounts do not account for bank-related additions and charges, such as interest and maintenance fees. Make adjustments to the cash account records for these differences. Once corrections and adjustments are made, compare the balances to see if they match. If not, repeat the process until the accounts are reconciled.

What Are Common Problems With Bank Reconciliations?

Infrequent reconciliations make it difficult to address problems when they arise as the needed information may not be readily available. Also, when transactions are not recorded promptly and when bank fees and charges apply, a mismatch can occur.

Where Do NSF Checks Go on a Bank Reconciliation?

NSF checks are recorded as an adjusted book balance line item on the bank reconciliation statement, with the NSF amount deducted from its balance.

Why Is Bank Reconciliation Important?

Bank reconciliation helps to identify errors that can affect tax and financial reporting. It also helps to identify and further prevent fraud.

How Often Should You Do a Bank Reconciliation?

To quickly identify and address errors, reconciling bank statements should be done monthly or as frequently as statements are generated.

The Bottom Line

Bank reconciliation statements are useful checks and balance tools used to detect errors, omissions, and fraud. When done frequently, they help companies thwart fraud before serious damage occurs and prevent errors from compounding. It is also a simple and invaluable process to help manage cash flows.