Bank reconciliation refers to the process by which the bank account balance of a business entity is reconciled with the amount recorded by financial institutions in the latest bank statement. The main objective of conducting this process is to prepare a statement recording the difference between these two.
A bank reconciliation statement ensures that all payments are processed and the required cash is deposited in the bank account. If it serves its purpose, towards the end of a financial period, the bank account statements reflecting a balance will equal the bank account’s ending balance.
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What is a Bank Reconciliation Statement?
The bank reconciliation statement can be referred to as the summary of all the business and banking activity drafted by a business entity. It is to reconcile the bank account balance with the internal cash record.
This statement identifies discrepancies between the business’ bank account balance and the financial institution-reported balance, if there are any. A business prepares a bank reconciliation statement during financial periods which reflects withdrawals, deposits, and other parameters impacting a bank account. Business entities use this as a monetary internal control tool to avoid fraudulent activities. Further, all sorts of charges levied by a bank on an account are accounted for in a reconciliation statement.
Understanding Preparation of Bank Reconciliation Statement
Reconciliation statements are processed by an accountant once a month. In the process, the accountant compares a business entity’s book with the bank statements. It is to make sure all transactions are properly accounted for.
The frequency of conducting the process is dependent on a company’s size and number of transactions done. There are certain large companies where reconciliation of bank statements is necessary to be carried out every day to ensure smooth workflow.
Though many companies still rely on manual means of reconciliation, bookkeeping software is an option that eases work. Most of this software has the bank account of the business body integrated, helping with all records and data in one place.
How to do a Bank Reconciliation?
- Firstly, one must obtain bank records. For this, one will need to access the list of transactions. Business owners will need bank statements for the last two months to complete bank reconciliation successfully. They also have to provide the closing balance of the previous month, which will be the starting number.
- Now deduct checks in transit or include the deposits that the business might not have paid. This amount is referred to as the adjusted cash balance.
- Add in earned interest (if there is any) or deduct any fees. Also, take into consideration the penalties and NSF (Non-Sufficient Funds) checks, the mention of which might not be in the business records.
- Ensure that the cleared checks and deposits are in alignment with amounts that the bank records. Business owners must ensure that the ending balance must match with each other.
- Lastly, examine thoroughly in case there is any error in the amounts.
Adjusting Balance Per Books
There can be scenarios when the balance in the cash account of a business body might need adjusting. For example, business owners might have to bear a fee that is levied by banks for keeping the account open. These fees are automatically withdrawn and processed from the business account. Hence, while drafting a bank reconciliation statement it is imperative to account for any charges taken from the account by making a journal entry.
In addition, an interest that a business earns is another thing that might need an adjustment. This interest amount enters the bank account automatically after a particular span. Hence, the accountant might need to make an entry that increases the cash reflected currently in the financial records.
After carrying necessary adjustments in the book, the balance must be the same as that of the bank account’s ending balance. A successful bank reconciliation statement is curated only when the figures will be the same eventually.
Benefits of Bank Reconciliation Statement
- Identify Fraud: A bank account statement is a vital tool that helps in identifying fraud. For instance, businesses can take steps to stop the unprincipled activity in case a check has altered which has led to substantial payments than expected. They can also detect issues like missed or double payments through bank reconciliation statements.
- Recognise Unfavourable Activity: Through bank reconciliation statements it is easy to recognise suspicious transactions and theft. Even it is easy to identify errors that can jeopardise financial reporting and tax reporting. Without conducting this process, there can be scenarios when companies are either paying too high or too less in taxes.
- Get a Financial Report: The statements usually reflect the financial standing of a business body for a specific span and help evaluate profitability. A proper reconciliation statement backs potential investors to make an apprised decision and extends other entities a vivid idea of the cash flow.
- Keep a Record: Through bank reconciliation statements, it is easy to keep a record of bank transactions, penalties and other charges in the business book. Further, keeping a proper track of business receivables and accounts payable has also become convenient.
Example of a Bank Reconciliation Statement
A bank reconciliation statement helps in comparing transactions in financial records with transactions mentioned on a bank statement.
For instance, XYX firm holds an ending balance of ₹40 lakhs on its record. However, the bank statement reflects an amount of ₹50 lakhs. After assessing this scenario, the owner of XYZ firm understands that the bank has not yet received a vendor check of ₹10 lakhs. On understanding this gap, XYZ owner adjusted the records, mentioning the check as outstanding and including this missing deposit.
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Frequently Asked Questions
What are the common issues with Bank Reconciliations?
Common issues with bank reconciliation generally crop up when there is infrequent reconciliation. As required information is absent, it hinders the prompt redressal of problems. In addition, when a business does not track transactions on time, however, the bank applies its fees, there is a higher chance of a mismatch
How frequently should one do bank reconciliation?
The frequency of preparing bank reconciliations depends on the size of the business and the number of transactions. However, in order to detect errors as quickly as possible, businesses can opt for monthly reconciliation of bank statements. Businesses can do it as frequently as they generate these bank statements.
What is the difference between a bank statement and a bank reconciliation statement?
Bank statements help clients or account holders to compare the entries in bank statements with cash book entries. On the other hand, a bank reconciliation statement helps an account holder to keep track of the bank account transactions and balance the client's book.
What are some of the common issues accountants find during bank reconciliation?
Here are the common issues that come to the surface while conducting bank reconciliation:
Checks that are returned to business owners after getting deposited.
Voided checks are cleared by banks which results in double payments.
Coming across uncleared and missing checks that are not presented to banks.
