Bank reconciliation statement is a statement that depositors prepare to find, explain and understand any differences between the balance in bank statement and the balance in their accounting records.
All transactions between depositor and the bank are entered separately by both the parties in their records. These records may disagree due to various reasons and show different balances. The purpose of preparing a bank reconciliation statement is to find and understand the reasons of this difference in account balance.
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.
Steps in preparing a bank reconciliation statement:
Step 1 – Find the deposits in transit: The first step is to see if one or more deposits are in transit. You can do so by comparing the deposits in your accounting record with the deposits shown in your bank statement. If you find a deposit in your accounting record that has not been shown in the bank statement, it means that deposit is in transit.
Add to the bank statement balance all deposits that are in your accounting record but have not been entered in the bank statement.
Step 2 – Find outstanding/unpresented checks and deduct from bank statement balance: Find all checks that you have issued but have not been presented for payment. You can do so by comparing the checks issued in your accounting record with the checks paid in your bank statement. If your accounting record shows that a check has been issued and your bank statement does not show a corresponding entry for that check, it means it is an outstanding or unpresented check.
Deduct from the bank statement balance all the checks that you have issued and entered in your accounting record but have not been paid by the bank.
Step 3 – Find and add credit memorandum to your accounting record: Bank issues a credit memorandum when it collects a note receivable on behalf of the depositor. Find if there is any credit memorandum issued by the bank that you have not entered in the accounting record.
Add to your accounting record any credit memorandum not entered in your accounting record.
Step 4 – Find and deduct debit memorandum from your accounting record: Bank provides various services to its depositors such as printing checks, processing NSF checks and collecting notes receivables etc. Bank deducts charges from depositor’s account for these services and intimates him or her about such deductions by issuing a debit memorandum. Find any debit memorandum not recorded in your accounting record.
Deduct from your accounting record any debit memorandum issued by the bank but not entered in the accounting records.
Step 5 – Are the adjusted balances equal? See whether adjusted balance of your accounting record is equal to the adjusted balance in your bank statement.
Step 6 – Make appropriate journal entries: The final step in a bank reconciliation is to prepare appropriate journal entries for the items that you have not recorded yet in your accounting records.
