Bank Reconciliation: How To Reconcile Bank Statement And Cash Book

Bank Reconciliation: How To Reconcile Bank Statement And Cash Book
To do a bank reconciliation in a business, you would pair the cash balances on the balance sheet with the corresponding amount on your bank statement so you can ascertain the differences between the two to make changes to the accounting records, resolve any differences and discover fraudulent activities.

What we will learn in this article:
  1. How Do You Reconcile a Bank Statement?
  2. What Are the Steps to Reconcile a Bank Statement?
  3. How Often Should You Reconcile Your Bank Account?
  4. What Is the Purpose of Bank Reconciliation?
  5. How Do You Reconcile a Bank Statement?
To reconcile a bank statement and the cash book, the account balance as stated by the bank will be compared to the general ledger/cash book of a business.

Businesses keep a cash book to record both bank and cash transactions. In a cash book, cash transactions are recorded in the cash column while the bank column shows the cash at the bank.

Similarly, the bank also keeps an account for each customer. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. Confused? Well, debits and credits in banking is different from debits and credits in accounting. The bank sends the account statement to its customers at the end or beginning of a new month, at regular intervals or on request. Although there will be extra charges if account statement is made available on request.

Sometimes, the balances on the account statement and that on the cash book are not the same. The business needs to spot the reasons for the disagreement and reconcile the differences. This is done to confirm that money is properly accounted for and the ending balances on the bank statement and cash book match.

To achieve this, a bank reconciliation statement will be prepared.

A Step-by-Step Guide In Preparing Bank Reconciliation Statement
Bank Reconciliation: How To Reconcile Bank Statement And Cash Book

Typically, you receive a bank statement from the bank at the end of each month. The statement identifies and itemizes the cash and other deposits made into the bank account of the business. The statement includes bank charges such as for account servicing fees often called maintenance fees, text messages fees etc .

Follow these steps to reconcile a bank statement once you have received it:

1. COMPARE THE DEPOSITS

Match the deposits in the bank statement with those in the business records.
  1. Compare the amount of each item recorded in the debit side of the bank column of the cash book (receiving side) with credit side of the bank statement (receiving side)
  2. Compare the amount on credit side of the bank column (giving side) with the debit side of the bank statement.
After doing this, mark the items appearing in both the records.

2. ADJUST THE BANK STATEMENTS

You have to adjust the balance on the bank statements to the corrected balance. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors.
  • Deposits in transit are amounts that are received and recorded in the books by the business but are yet to be recorded by the bank. They are added to the bank statement for bank reconciliation.
  • Outstanding checks are checks that have been written and recorded in cash account of the business but have not yet cleared the bank account. They are deducted from the bank balance. Outstanding checks often occurs when the checks are written in the last days of the month.
  • Bank errors are mistakes made by the bank while preparing the bank statement. Common errors include entering an incorrect amount in the bank statement or omitting an amount from the bank statement. You will have to compare the cash account’s general ledger to the bank statement to identify the errors.

3. ADJUST THE CASH ACCOUNT

The next step in bank reconciliation process is to adjust the cash balance in the business book. Adjust the cash balances in the business account by adding interest or deducting monthly bank charges and overdraft fees.

To do this, businesses need to identify the bank charges, NSF checks and errors in accounting.
  1. Bank charges are service charges deducted for the bank’s processing of the business’ checking account activity. This can include monthly charges or charges for overdraft. Bank charges must be deducted from your cash account. Any interest earned on your bank account balance must be added to the cash account.
  2. An NSF (not sufficient funds) check is a dishonoured check by the bank due to insufficient funds in the entity’s bank accounts. This means that the amount on the check has not been deposited in your bank account and hence needs to be deducted from your cash book. CHECK is also known as CHEQUE, so you don't start wondering what CHECK means.
  3. Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. There will be an increase or decrease in the cash account in the books when the error is corrected.
  4. Overdraft is over-withdrawing from a bank account. That is, when you withdraw more than your account balance. This comes with a charge.
4. COMPARE THE BALANCES

After adjusting the balances as per the bank and as per the books, the adjusted amounts should be equal. If the amounts are still not equal, you will have to repeat the reconciliation process again until they are balanced.

Once the balances as per the bank and as per the books are equal, businesses need to prepare journal entries for the adjustments to the balance per books.

How Often Should You Reconcile Your Bank Account?

Ideally, it is necessary to reconcile your bank account every time you receive a bank statement. This is often done monthly, weekly and even daily by businesses with a large number of transactions.

Before commencing the reconciliation process, business owners and management should make sure that they have recorded all transactions on your bank statement till date. Businesses using online banking service can download the bank statements for the regular reconciliation instead of entering the information manually.

What are the Purposes of Bank Reconciliation?

There are several advantages of bank reconciliation process, they include:
  1. It helps to detect errors such as double payments, missed payments, calculation errors, payments errors etc.
  2. There are some charges or fees on the bank account, bank reconciliation helps in tracking and adding bank charges and other penalties in the books.
  3. It helps to spot fraudulent transactions and theft in a business
  4. Through bank reconciliation, you will keep track of accounts payable and receivables of the business
It is easier and error-free to do bank reconciliation through accounting software. The bank transactions are automatically imported, allowing you to match and categorize many transactions with just one button click. This makes the process involved in bank reconciliation efficient and controllable.

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