Bank reconciliation

Bank reconciliation is the process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement, with the goal of ascertaining the differences between the two and booking changes to the accounting records as appropriate. The information on the bank statement is the bank's record of all transactions impacting the entity's bank account during the past month.

At a minimum, you should conduct bank reconciliation shortly after the end of each month, when the bank sends the company a bank statement containing the bank's beginning cash balance, transactions during the month, and ending cash balance. It is even better to conduct bank reconciliation every day, based on the bank's month-to-date information, which should be accessible on the bank's web site. By completing a bank reconciliation every day, you can spot and correct problems immediately.

The essential process flow for a bank reconciliation is to start with the bank's ending cash balance, add to it any deposits in transit from the company to the bank, subtract any checks that have not yet cleared the bank, and either add or deduct any other items. Then, go to the company's ending cash balance and deduct from it any bank service fees, NSF checks and penalties, and add to it any interest earned. At the end of this process, the adjusted bank balance should equal the company's ending adjusted cash balance.

Bank Reconciliation Terminology

The key terms to be aware of when dealing with a bank reconciliation are:

• Deposit in transit: Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds. If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation. A deposit in transit occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several days can cause a delay), or the entity has not yet sent the deposit to the bank at all.

• Outstanding check: A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash. If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.

 A check that was not honored by the bank of the entity issuing the check, on the grounds that the entity's bank account does not contain sufficient funds. NSF is an acronym for "not sufficient funds." The entity attempting to cash an NSF check may be charged a processing fee by its bank. The entity issuing an NSF check will certainly be charged a fee by its bank.

We should remember two basic concepts which will be used in this process:

• One is bank statement - list of all transactions which occurred during a particular period of time and impacted cash in bank account of business. Such statement is prepared by bank and is provided to the company owning account in the bank.

• The other is cash book - it is accounting book of prime entry listing all the transactions which impacted cash in bank and this book is prepared by the accountant

It is required that entries on the bank statement are exactly the same as entries in the cash book, since cash book is a reflection of bank statement. Also the final balance in the bank statement should be equal to the final balance in the cash book.

If we take cash book, in it we can see how much cash business has at the end of particular period.

However actually it might happen, that balance of cash book is not the same as the balance in the bank statement. The question how to do bank reconciliation covers process how to explain and eliminate such difference.

To prepare the bank reconciliation statement, the following rules may be useful for the students:

1. Check the cash book receipts and payments against the bank statement.

2. Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.

3. Make a list of these items.

4. Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.

5. Make a list of these items.

6. Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.

Method (Starting With the Cash Book Balance):

a) If the cash balance is a debit balance, deduct from it all ck´s, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement.

b) If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.

Alternatively:  

Example

Condition:

March 31, 2009. Company ABC has a balance in the cash book equal to $706.56. In the bank statement there is a balance equal to $987,45

Checking cash book and bank statement it was determined that:

$50 of cash receipt during March was not recorded in the cash book.

Amount paid by CK and recorded into the cash book, but not yet recorder into the bank statement amount to $ 145.90

Ck submitted for payment and recorded in the cash book, but not yet presented to the bank amount to $376.79

The task is to do bank reconciliation



1. First step: is to make correction to the cash book

Cash Book

Opening balance $706.56

Correction of error +$50

Closing balance $756.56

2. Second step: is to make adjustments to the bank statements

Bank Statement                                                                                  $ 987.45
Check received but not included into the bank statement               +$ 145.90
Ck´s paid but not yet submittedto the bank                                    -$ 376.79

Closing balance                                                                               $756.56

After finalizing the process how to do bank reconciliation we have the same final balance in cash book and bank statement


Video

http://www.youtube.com/watch?v=jraqukbGHKU&feature=related

Written by
Natasha Méndez


Sources consulted
Author: Harold Averkamp
Date: june 14 of 2011

http://www.accountingcoach.com/online-accounting-course/13Xpg01.html