Lesson 42 - Beginner accounting course

42. How to Prepare a Bank Reconciliation Statement

A bank reconciliation statement is a critical tool for comparing and reconciling a company’s cash account in the general ledger to its bank statement. The purpose of preparing a bank reconciliation is to ensure that the company’s cash records are accurate and match the actual bank balance, accounting for timing differences, errors, or unrecorded transactions. This process helps identify discrepancies and ensures that the financial statements accurately reflect the company's financial position.

Steps to Prepare a Bank Reconciliation Statement

1. Gather the Necessary Documents

To begin preparing a bank reconciliation, you will need the following documents:

• The Bank Statement: This statement is usually provided by the bank on a monthly basis and details all transactions (deposits, withdrawals, bank charges, etc.) that have occurred in the bank account during the period.

• The Company’s Cash Book (General Ledger): This is the record maintained by the company that tracks all transactions involving cash.

Ensure that both the bank statement and the company’s cash book cover the same period to facilitate an accurate comparison.

2. Compare the Opening Balances

Start by verifying the opening balances on both the bank statement and the company’s cash book. The opening balance should match the previous month’s closing balance. If they do not match, check the records for any errors or adjustments made after the last reconciliation.

3. Match Deposits in the Cash Book with the Bank Statement

Next, compare all deposits recorded in the company’s cash book with those shown on the bank statement. Mark each deposit that appears in both records.

• If there are deposits in the company’s records that do not appear on the bank statement, these are typically deposits in transit.

• If there are deposits on the bank statement that are not in the cash book, these may be unrecorded deposits or errors.

4. Compare Withdrawals and Payments

Compare all withdrawals (checks, withdrawals, transfers) recorded in the company’s cash book with those on the bank statement. Mark each transaction that appears in both records.

• Outstanding checks may be recorded in the cash book but not yet cleared by the bank.

• Any withdrawals on the bank statement that do not appear in the company’s cash book might be unrecorded payments or errors.

5. Identify Bank Charges and Interest

Banks often charge fees (e.g., maintenance fees, overdraft charges) or offer interest on the account balance. These charges or interest may appear on the bank statement but might not yet be recorded in the company’s cash book.

• Bank Charges: Subtract these from the company’s cash book balance.

• Interest Earned: Add any interest earned to the cash book balance.

6. Adjust for Errors or Omissions

Check for any discrepancies, such as:

• Errors in the company’s cash book: Mistakes in recording a transaction (e.g., a payment recorded for the wrong amount).

• Bank errors: Occasionally, the bank may make errors in processing a transaction, such as an incorrect fee or withdrawal.

These errors need to be corrected by making the necessary adjustments to the cash book or contacting the bank to resolve the issue.

7. Account for Outstanding Items

There may be outstanding checks (checks that have been written but not yet cleared the bank) or deposits in transit (deposits made but not yet reflected in the bank statement). These need to be accounted for in the reconciliation statement.

• Outstanding checks are subtracted from the bank balance.

• Deposits in transit are added to the bank balance.

8. Prepare the Bank Reconciliation Statement

Once all necessary adjustments have been made to both the bank statement and the company’s cash book, prepare the bank reconciliation statement. This statement will include the following:

• Bank Balance per Statement: The ending balance on the bank statement.

• Add: Deposits in Transit: Any deposits that have not yet cleared the bank.

• Less: Outstanding Checks: Any checks written by the company that have not yet cleared the bank.

• Adjusted Bank Balance: The balance after adjustments.

In addition to reconciling the bank balance, the company’s cash book balance must also be adjusted to match the bank balance, as follows:

• Cash Book Balance: The balance in the company’s general ledger or cash book.

• Add: Unrecorded Deposits: Any deposits made but not yet recorded in the company’s cash book.

• Less: Bank Charges or Errors: Any bank fees or errors that need to be adjusted in the cash book.

• Adjusted Cash Book Balance: The final adjusted balance in the company’s cash book.

The adjusted bank balance and the adjusted cash book balance should now match, confirming that the reconciliation is accurate.

9. Final Review

Review the entire reconciliation process to ensure that all adjustments have been made accurately and all discrepancies have been resolved. Ensure the adjusted bank balance and adjusted cash book balance match.

Example of a Bank Reconciliation Statement

Here is an example of how a bank reconciliation statement might look:

In this case, after making the necessary adjustments, both the adjusted bank balance and the adjusted cash book balance are $9,500, which means the reconciliation is complete and accurate.

Key Takeaways

• Bank reconciliation ensures the company’s cash records are accurate and match the bank’s records.

• It helps identify errors, fraud, and unrecorded transactions.

• Regular reconciliation prevents discrepancies, improves financial accuracy, and ensures effective cash flow management.

• A properly prepared bank reconciliation statement provides clarity and transparency in the company’s financial statements.

By performing regular bank reconciliations, companies can maintain accurate financial records, ensure better cash management, and comply with regulatory requirements.