Bank Reconciliation


Bank reconciliation statement is a report which compares the bank balance as per company's accounting records with the balance stated in the bank statement.

It is normal for a company's bank balance as per accounting records to differ from the balance as per bank statement due to timing differences. Certain transactions are recorded by the entity that are updated in the bank's system after a certain time lag. Likewise, some transactions are accounted for in the bank's financial system before the company incorporates them into its own accounting system. Such timing differences appear as reconciling items in the Bank Reconciliation Statement.

The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies between the accounting records of the entity and the bank besides those due to normal timing differences. Such discrepancies might exist due to an error on the part of the company or the bank.

Importance of Bank Reconciliation

  • Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank.
  • Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals. However, in order for the control process to work effectively, it is necessary to segregate the duties of persons responsible for accounting and authorizing of bank transactions and those responsible for preparing and monitoring bank reconciliation statements.
  • If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance, it provides added comfort that the bank transactions have been recorded correctly in the company records.
  • Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business.

Preparing a Bank Reconciliation Statement

Balance as per corrected Cash Book

This is the starting point of a bank reconciliation. Corrected bank balance is calculated by adjusting the cash book ledger balance for transactions that are recorded by the bank but not by the entity as shown below:

Amount $
Balance as per Cash Bookxxx
Add:
   Direct Creditsxxx
   Interest on Depositxxx
Less:
   Bank Charges(xxx)
   Direct Debits(xxx)
   Standing Order(xxx)
   Errors in Cash Book(xxx)
Balance as per corrected Cash Bookxxx

Bank Reconciliation statement is prepared after corrected Cash Book balance is calculated as described above:

Bank Reconciliation Statement as at 31 December 2011
Amount $
Balance as per corrected Cash Bookxxx
Add:
   Unpresented Chequesxxx
Less:
   Deposits in Transit(xxx)
   Errors in Bank Statement(xxx)
Balance as per Bank Statementxxx