Performing a bank reconciliation involves a systematic approach to comparing and reconciling the transactions and balances in a company’s accounting records with the information provided in the bank statement. Here is a step-by-step guide on how to do a bank reconciliation:

How to do a Bank Reconciliation?

Companies can perform a bank reconciliation through the following steps.

Gather Records

Obtain the bank statement for the relevant period and gather the company’s accounting records, including cash receipts, disbursement journals, and any other financial transaction records.

Compare Beginning Balances

Start by comparing the beginning balance of the bank statement with the beginning balance in the company’s cash account. Ensure that both figures match.

Identify Deposits in Transit

Check for any deposits made by the company but not yet reflected in the bank statement. Add these deposits to the bank statement balance.

Find Outstanding Checks

Look for any checks issued by the company but not yet cashed or processed by the bank. Deduct the amount of outstanding checks from the bank statement balance.

Identify Bank Errors

Scan the bank statement for any errors made by the bank, such as incorrect charges or erroneous transactions. Note these errors for resolution with the bank.

Check for Bank Fees and Interest

Verify if the bank has charged any fees or credited interest to the account. Adjust the company’s accounting records accordingly.

Record Other Transactions

Review other transactions, such as electronic transfers, automatic payments, and any other bank-related activities. Ensure that these transactions are accurately recorded in the company’s accounting records.

Reconcile Ending Balances

After making the necessary adjustments for deposits in transit, outstanding checks, bank errors, and other transactions, compare the adjusted ending balance on the bank statement with the ending balance in the company’s cash account.

Prepare Reconciliation Report

Create a bank reconciliation report that outlines the process, the identified adjustments, and the final reconciled balance. This report serves as a formal record of the bank reconciliation process.

Resolve Discrepancies

If there are any discrepancies that cannot be resolved immediately, investigate further to identify the reasons behind the differences. Rectify any errors and adjust the records accordingly.

Document the Reconciliation

Properly document all adjustments made during the bank reconciliation process for future reference and audit purposes.

Regular Reconciliation

Perform bank reconciliation on a regular basis, typically monthly, to ensure that the financial records are consistently accurate and up-to-date.

What is an Example of Bank Reconciliation?

Assume that ABC Company performs a bank reconciliation for the month of June 2023. Here are the relevant details:

• Bank Statement: The bank statement for June 2023 shows an ending balance of $10,000.
• Company Records: In ABC Company’s accounting records, the ending balance in the cash account (before reconciliation) shows $8,500.
• Deposits in Transit: ABC Company made a deposit of $2,000 on June 30, but it is not yet reflected in the bank statement.
• Outstanding Checks: Three outstanding checks are yet to be cleared by the bank: Check #101 for $500, Check #102 for $300, and Check #103 for $200.
• Bank Charges: The bank charged a fee of $20 for account maintenance.
• Bank Interest: The bank credited $30 as interest earned on the account.
• Bank Errors: The bank mistakenly charged a fee of $50 for an ATM withdrawal that was never made by ABC Company.

ABC Co. can now perform the bank reconciliation as follows.

Start with the company’s ending cash balance: $8,500

Add deposits in transit: $8,500 + $2,000 = $10,500

Deduct outstanding checks: $10,500 – $500 – $300 – $200 = $9,500

Adjust for bank charges and interest: $9,500 – $20 + $30 = $9,510

Adjust for bank error: $9,510 + $50 = $9,560

The final reconciled balance after considering all adjustments is $9,560.

Bank Reconciliation Report for June 2023

Bank Statement Ending Balance: $10,000

Add: Deposits in Transit: $2,000

Adjusted Bank Balance: $12,000

Company Records Ending Cash Balance: $8,500

Less: Outstanding Checks: $500 + $300 + $200 = $1,000

Adjusted Company Cash Balance: $7,500

Bank Charges: ($20)

Bank Interest: $30

Final Reconciled Balance: $9,560

By performing the bank reconciliation and considering additional items like bank charges and interest, ABC Company ensures that its financial records align with the bank’s records and have accounted for all relevant transactions, including fees and interest earned. This reconciliation process strengthens the financial accuracy and transparency of the company’s cash account, enabling confident financial reporting and informed decision-making.

Conclusion

Bank reconciliation statement serves as a vital financial tool to ensure the accuracy and reliability of a company’s cash records. By reconciling the differences between the company’s cash book and the bank statement, this process helps identify errors, detect fraud, and maintain financial transparency.

Through this critical financial practice, businesses can confidently report their cash position, make informed decisions, and uphold the integrity of their financial records.