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November 20, 2006

What is a bank reconciliation?

A bank reconciliation is a process performed by a company to ensure that the company’s records (check register, general ledger account, balance sheet, etc.) are correct and that the bank’s records are also correct.

The bank reconciliation for a company’s checking account begins with the company noting the balance per the bank statement and then making some notations about that balance. For example, the balance on the bank statement is probably not the amount that appears in the company’s records. In all likelihood the checks written by the company in the days immediately before the date of the bank statement will not have cleared (been deducted from) the checking account. These are called outstanding checks. Another possibility is that the company received money on the closing date of the bank statement and properly recorded the amount in its records. However, the money was deposited into the bank too late in the day and will appear on the next bank statement. This is known as a deposit in transit. Let’s begin the bank reconciliation by assigning some amounts to the items just mentioned:

Balance per bank statement at October 31 $6,442.56; outstanding checks as of October 31 $3,400.00; deposits in transit at October 31 $1,000.00. The adjusted balance per the bank statement on October 31 is $4,042.56 ($6,442.56 + $1,000.00 - $3,400.00).

Next, the bank reconciliation requires that the amount in the company’s records (for this bank statement account) be noted. In all likelihood the amount in the company’s records will not agree with the adjusted bank amount. One explanation could be the bank fees that the bank took out of the checking account, but the fees were not yet recorded in the company’s records. A common example is the bank service charge for maintaining the checking account, handling returned checks, and check printing fees. The bank might also deduct loan payments or process other transactions that the company has not yet entered into its records. Let’s illustrate the company’s adjusted balance with some amounts:

Balance per the company’s records (account register, general ledger account) $4,340.56; bank service charge $63.00; check printing charge $120.00. The adjusted balance per the company’s records, or per books, is $4,157.56 ($4,340.56 - $63.00 - $120.00).

If the adjusted balance per the bank agrees with the adjusted balance per the books, the bank reconciliation is completed. In our example, the adjusted balance per the bank is $4,042.56 and the adjusted balance per the company’s books is $4,157.56. The difference of $115.00 means that the bank reconciliation is not completed. The $115.00 difference must be identified. Finding the difference is likely to be tedious, but it must be done. After all differences have been identified, any adjustments to the company’s balance must be entered into the company’s records with a journal entry. It is the reconciled, adjusted balance that is to be reported on the company’s balance sheet.

As mentioned above, performing a bank reconciliation is necessary for the accuracy of the accounting records and for the company’s financial statements. Bank reconciliations are also associated with a company’s internal controls over cash. If the bank reconciliation is performed by someone other than the authorized check signers and record keepers, the company has improved its internal control over cash.

Learn more about Bank Reconciliation.

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Comments

15 Responses to “What is a bank reconciliation?”

  1. ramesh on March 28th, 2008 6:30 am

    what is budget

  2. farzeen Mahmood on May 27th, 2008 9:37 am

    what is the purpose of” bank reconcilation statement”

  3. aditya on June 25th, 2008 4:22 am

    bank reconcillation is very important for the company because at the end of the financial year we need to have a check that the company cash account has the correct balance and financial transaction of the company has been recorded corectly or not.

  4. AJ on July 10th, 2008 3:18 pm

    Bank Reconciliation definition for those who don’t have an accounting background.
    BANK RECONCILIATION IS DEFINED AS MATCHING YOUR BANK BALANCE WITH THE CHECK BOOK BALANCE.

  5. judith chumo on August 1st, 2008 12:58 am

    Bank reconciliation outlines various transactions recorded in cash book and not in bank statement and vice versa

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  7. WELL WISHER,kollam on September 20th, 2008 11:04 am

    Bank reconciliation statement is prepared to show the cause of differences blw the balance of cash book and passbook

  8. well wisher,kollam on September 20th, 2008 11:07 am

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  10. karissa on December 8th, 2008 9:21 am

    what is the procedure of bank reconciliation?

  11. accounts outsourcing on June 10th, 2009 6:18 am

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    Keep up the good work…
    Regards,
    accounting outsourcing

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  15. Geoffrey on November 13th, 2009 5:26 pm

    A bank reconciliation is simply comparing your cash book balance with your bank statement at a given date.

    It is highly likely that the two balances won’t match and so we have to find out why and account for the reasons accordingly.

    More often than not you will come across timing differences between your accounts and the bank, i.e when the business pays out a check the bank will account for that check several days after the business does.

    Standing orders, direct debits, bank charges and interest may not be accounted for in the cash book but will show up on the bank statement.

    And finally, we are only human and do sometimes make errors. Upon reconciling with the bank statement you might find that you didn’t add some figures correctly or perhaps you entered $72 instead of $27.

    These are all reasons why bank reconciliations are so very important. You are effectivley double checking your figures against the bank’s figures.

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