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

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What Is a Bank Reconciliation Statement?

A company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance. The statement shows reasons for any discrepancies between the two. A bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud.

Key Takeaways

• A bank reconciliation statement summarizes banking and business activity, comparing the bank's account balance with internal financial records.
• Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account.
• These statements can help uncover or prevent fraud at a company, as well as identify accidental discrepancies.
• After all adjustments, the balance on a bank reconciliation statement should equal the ending balance of the bank account.

Understanding the Bank Reconciliation Statement

Reconciliation is the process of comparing two different records. A bank reconciliation statement can help you identify differences between your company’s bank and book balances.

In this case, the reconciliation includes the deposits, withdrawals, and other activities affecting a bank account for a specific period. Any discrepancies lead to making necessary adjustments or corrections.

Here are other uses of a bank reconciliation statement.

Identifying Accounting Errors

Bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank. Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies. Some mistakes could adversely affect financial reporting and tax reporting. Without reconciling, companies may pay too much or too little in taxes.

Detecting Fraud

Bank reconciliation statements are effective tools for detecting fraud, theft, and loss. For example, if a check is altered, the payment made for that check will be larger than you anticipate. If you notice this while reconciling your bank accounts, you can take measures to halt the fraud and recover your money.

However, you typically only have a limited period, such as 30 days from the statement date, to catch and request correction of errors.

Managing Risk

Financial statements show the health of a company or entity for a specific period or point in time. Accurate financial statements allow investors to make informed decisions. The statements give companies clear pictures of their cash flows, which can help with organizational planning and making critical business decisions.

An accountant typically processes reconciliation statements at least once a month for a company. Software that automates bank reconciliation can help reduce errors associated with manual processing. Make sure that any staff or employee reconciling bank accounts doesn't also have access to funds through means such as deposits, accounts payable, or electronic fund transfer authorization.

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. An online template can help guide you, but a simple spreadsheet is just as effective.

Here are the basic steps to follow:

1. Gather a copy of the bank statement for the period and your accounting system or company ledger list of all payments, deposits, and cash account balances from the accounting system.
2. Start with your closing balance for the prior month. That will be your starting number.
3. Examine each bank statement item leaving the bank account, such as checks, transfers, and bank fees. Each statement item should be on your leger or system list. Ensure that your deposits and cleared checks match the amounts the bank recorded. If not, record the missing or incorrect item.
4. Review bank transaction items on the statement that add to the account, such as interest, deposits, transfers, and bank adjustments. Each positive transaction should also be reflected in your ledger or accounting system. If not, record the missing item.
5. At the end of your bank reconciliation statement process, the accounting record’s balance (after making adjustments) should equal the bank statement balance.
6. If there are further discrepancies, investigate what might have been missed in your recording or errors that may have been made at the bank.
   

If you find a large-dollar-amount discrepancy between bank and company ledgers, your current bank statement may include a significant deposit or withdrawal from the previous month.

Adjusting Discrepancies Between Books and Bank

The cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement. In these cases, journal entries record any adjustment to the book’s balance. After fee and interest adjustments are made, the book balance should equal the ending balance of the bank account.

Fees

A bank may charge an account maintenance fee, typically withdrawn and processed automatically from the bank account. When preparing a bank reconciliation statement, a journal entry is prepared to account for fees deducted.

Interest Earned

Interest earned also requires an adjustment. Interest is automatically deposited into a bank account after a certain period of time. So the company’s accountant prepares an entry increasing the cash currently shown in the financial records. After adjustments are made, the book balance should equal the ending balance of the bank account.

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 can identify and correct the source of errors.

For example, say ABC Holding Co. recorded an ending balance of $500,000 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 hadn't been presented to the bank. It also missed two $25 fees for service charges and non-sufficient funds (NSF) checks during the month.

The reconciliation statement allows the accountant to catch these errors each month. The company can now take steps to rectify the mistakes and balance its statements. Here's an example in the table below.

What Are Common Problems With Bank Reconciliations?

Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren't recorded promptly and bank fees and charges are applied, it can cause mismatches in the company's accounting records.

Where Do Non-Sufficient Funds (NSF) Checks Go on a Bank Reconciliation?

Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. The NSF amount deducted from its balance.

Why Is Bank Reconciliation Important?

Bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting. It also helps to identify, stop, and prevent fraud.

How Often Should You Do a Bank Reconciliation?

To quickly identify and address errors, reconciling bank statements should be done by companies or individuals at least monthly. They also can be done as frequently as statements are generated, such as daily or weekly.

The Bottom Line

Bank reconciliation statements are tools companies and accountants use to detect errors, omissions, and fraud in a financial account. Bank reconciliation is a simple and invaluable process to help manage cash flows.

When done frequently, reconciliation statements help companies identify cash flow errors, present accurate information to investors, and plan and pay taxes correctly. They can also be used to identify fraud before serious damage occurs and can prevent errors from compounding.

1. Square. "Best Practices for Business Account Reconciliation."
2. Sage. “What To Consider When Doing A Bank Reconciliation For A Client.”
3. FreshBooks. "How To Do a Bank Reconciliation?"
4. Helpwithmybank.gov. "The Bank Paid a Check When It Was Obvious That the Signature Was Not Mine. Why Didn't the Bank Catch This?"
5. Center for Government Innovation. "Best Practices for Bank Reconciliations." Page 3.

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