Companies prefer using bank accounts for the safety and ease it brings to their cash systems. Companies record their transactions through their cash accounts. On the other hand, banks have internal records to track customer balances. The bank provides a bank statement to the company or customer. Usually, these records do not match, prompting a bank reconciliation.
What is a Bank Reconciliation?
A bank reconciliation is an internal control procedure to reconcile bank balances. This reconciliation occurs between the cash account and bank statement. As mentioned above, the former comes from a company while the latter is from a bank. The primary objective of the bank reconciliation process is to identify the discrepancies between these records.
A bank reconciliation is crucial in ensuring the accuracy of the cash records. On top of that, it can also help identify any instances of fraud and error in these records. Therefore, bank reconciliations are crucial within the internal control systems of a company. Once companies establish the differences between the two records, they can take the necessary steps to reconcile them.
How to prepare a Bank Reconciliation Statement?
Companies must go through several steps to prepare a bank reconciliation statement. This statement summarizes the differences between the cash book and the bank statement. Before that, however, companies must ensure there is a need to prepare this statement. It only occurs if the closing balances on the cash book and bank statement do not match.
Similarly, companies must match the opening balances on both records. If these balances do not match, the company must obtain any prior bank reconciliation statements to explain the differences. Subsequently, companies can prepare the bank reconciliation statement using the following steps.
- Compare all deposits and withdrawals in the bank statement to the cash book.
- Identify any cheques that are in transit or outstanding.
- Adjust for those items in the cash book balance to get the adjusted balance.
- Identify any unrecorded expenses and income included in the bank statement. These may be interest income and charges, service fees, NSF checks, etc.
- Record those items in the cash book to get the final cash book balance.
- At this point, the cash book balance and the closing balance on the bank statement should match.
A company, Green Co., receives its bank statement at the end of each month. Last month, the company’s bank balance on this statement was $85,000. However, Green Co.’s cash book balance was $75,000. After comparing the cash book transactions to the ones on the bank statement, Green Co. found the following items.
- Deposits of $10,000 were not in transit.
- Checks of $25,000 were still outstanding.
Green Co. adjusted those amounts in the cash book balance. After these adjustments, Green Co. reached an adjusted cash book balance of $90,000 ($75,000 – $10,000 + $25,000). Similarly, the following items were a part of the bank statement, which the company had not recorded in its cash book.
- Interest charges of $1,000.
- Interest income of $3,000.
- NSF checks of $7,000.
After recording these amounts, the cash book balance was $85,000. Due to the bank reconciliation, Green Co.’s bank statement balance matched its cash book balance.
Bank reconciliation is a part of the internal control systems within a company. This process helps companies identify and reconcile differences between the bank statement and cash book balances. Usually, companies perform this process after every month or at regular intervals. Bank reconciliation is crucial in tracking bank and cash balances.
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