BANK RECONCILIATION STATEMENT

Bank Reconciliation Defined

Have you ever balanced your checkbook? Why did you do that? Was it to make sure that you didn't make any mistakes when you were adding deposits or subtracting expenses? I bet it was because you wanted to make sure that your balance in your checkbook was the same as the balance in the bank, right? Everything that we just talked about refers to what we in accounting commonly call doing a bank reconciliation. A bank reconciliation is the balancing of a company's cash account balance to its bank account balance.

Preparing a Reconciliation

Since it is really important to make sure that the cash account and the bank account balances match, a company prepares bank reconciliations on a monthly basis. There are several steps that are involved in this, but, even so, it is a relatively simple thing to do. Let's go through the steps and prepare the reconciliation.

Step 1: Collect the documents that you will need to prepare the reconciliation. The most common documents would be the bank statement that is received from the bank and the check register for the month. In the accounting industry, most check registers are printed off of accounting software and used for the reconciliation. The bank statement tells you what the bank balance was at the beginning of the month, the deposits the bank has on record for the account, the withdrawals that have been made from the account, and the ending balance of the account on a specific date. The check register will show all the deposits and withdrawals that were made by the company during a given time period. There is one key difference between the bank statement and the check register. The bank statement only lists deposits and withdrawals that have processed through the bank, while the check register lists all the deposits and withdrawals that a company had in a specific period, regardless of if it has cleared the bank or not.

Step 2: The second step in preparing the bank reconciliation is the most tedious. The object of this step is to account for all the deposits and withdrawals that a company has recorded and that have also cleared the bank. If you are manually preparing the reconciliation, you would highlight or check off the entries that are common among the two. In a computerized accounting program, you can simply just click on the entries to mark them as cleared. Cleared means that the item has been recorded in both the company's records and the bank's records.

Step 3: Once you have marked the items that are cleared on the check register, you move to the next step. In this step, you will make a list of any items that have been recorded in the check register but have not cleared the bank. Typically, a company will always have outstanding debits in the month. Outstanding debits are checks and other withdrawals that have been recorded in the company's cash account but have not yet been recorded in the bank's accounting records. There may also be outstanding credits that need to be accounted for. Outstanding credits are deposits that have been recorded in company's records but don't yet appear on the bank's records.

Step 4: Now that you have all the outstanding debits and outstanding credits together, it's time to do the math. Any debits that haven't been accounted for will need to be deducted from the balance on the bank statement. Likewise, any credits that have not been accounted for will be added to the balance on the bank statement. In a perfect world, once this step is complete, the current balance in the checkbook should match the adjusted bank statement balance.

Step 5: Notice that I just said, 'in a perfect world the balances would match'. It's not always a perfect world. Sometimes the balances don't match. That's when your detective skills come into play. If the current balance in the checkbook does not match the adjusted bank statement balance, then you have to start looking for errors. The most common error that occurs and is discovered in the reconciliation process is called transposition. Transposition occurs when the order of numbers are inadvertently switched during the recording process. For example, let's say that a check was written for $412 to pay a utility bill but was recorded in the checkbook as $421.00. That error would cause a $9 difference between the two balances. Of course, there could be other errors that cause the balances not to equal. Either a check or a deposit may not have been recorded or Something may have been recorded twice.