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

For example, a business has an operating account with a balance of $15,000 on July 1. During the course of the month, they write three checks for $1,000, $397, and $1,900. They also make a deposit of $7,000. According to their reconciliation statement, they have a balance of $18,703, but the book balance shows a balance of $18,648. Upon looking at the bank reconciliation statement, they found that they didn't record the account's $25 monthly service fee. They also find that the check for $397 was mistakenly cashed for $367 instead. They can now take steps to rectify the errors and balance their statements.

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

How to Do a Bank Reconciliation

To successfully complete your bank reconciliation, you'll need your bank statements for the current and previous month as well as your company ledger. Many templates available online can help guide you, but a simple spreadsheet is just as effective.

  1. Start with your closing balance of the prior month. That will be your starting number.
  2. Add any deposits that may not have cleared or deduct any checks in transit. This is your adjusted cash balance.
  3. Now that you have your adjusted cash balance, add in any earned interest or deduct any fees, NSF checks, or penalties that may not have been recorded in your company records.
  4. Make sure that your deposits and cleared checks match the amounts that the bank recorded. The ending balance should then be the same.
  5. If there are discrepancies, investigate to see what might have been missed in your recording or errors that may have been made at the bank.

All deposits and withdrawals posted to an account must be used to prepare a reconciliation statement.

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 affect 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 its 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.