What Is a Bank Reconciliation Statement, and How Is It Done?

What Is a Bank Reconciliation Statement?

A bank reconciliation statement is a summary of banking and business activity prepared by a company or individual to reconcile the balance in their own cash records with their bank account balance. This statement shows reasons for any discrepancies between the two. A company can prepare a bank reconciliation statement any time during its financial periods.

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.

Understanding the Bank Reconciliation Statement

Bank reconciliation statements ensure that payments have been processed and cash collections have been deposited into the bank. The reconciliation statement helps identify differences between the bank balance and the book balance to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once a month for a company.

For example, say a business has an operating account with a balance of $15,000 on July 1. During the course of the month, it writes three checks for $1,000, $397, and $1,900. It also makes 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, the business finds that it didn’t record the account’s $25 monthly service fee. It also discovers that the check for $397 was mistakenly cashed for $367 instead. The company can now take steps to rectify the errors and balance its statements.

How To Do a Bank Reconciliation

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

Here are the basic steps to follow:

1. Start with your closing balance for 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, non-sufficient funds (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.
   

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, then 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 or entity 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 with 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 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 adjusted its records, noting the check as outstanding and adding the missing deposit.

The Bottom Line

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