Bank Reconciliation – Definition, Benefits, and How to Process?

Bank Reconciliation

Any organization must plan ahead to guarantee that the records appropriately reflect cash flows. To guarantee that bank account balances are precise and correct, there is a necessary procedure. That necessary step is known as bank reconciliation. So, when you find discrepancies in the records, accountants look into them and take appropriate action.

In the following blog, we will cover the definition of account reconciliation and how to process it, and much more.

What is Bank Reconciliation?

The process of reconciling a bank involves comparing the balances of a cash account as recorded in an entity’s accounting records (cheque register, a general ledger account, balance sheet, etc.) to the corresponding data on a bank statement. Finding the discrepancies between the two is the purpose of this procedure. If there are any discrepancies in the accounts then they must have a proper justification. It helps in identifying any necessary alterations in the accounting records.

Accountants describe the bank statement as reconciled when there are no unexpected variances. To keep tabs on its assets, the company’s internal controls should include bank account reconciliation. It must be carried out by someone other than a record keeper or authorized cheque signer for it to be legitimate.

Bank Reconciliation Accounting – Key Terms

Here are a few key terms that you should understand before learning more about bank reconciliation.

Bank Reconciliation Accounting

Deposit in transit – Cash or cheques that is in the name of the organization but still not on the bank’s books.

An outstanding cheque – A cheque payment that the issuing business has recorded but has not yet been debited against cash in its bank account.

NSF cheque – The NSF stands for “not sufficient fund.” It is a cheque that was rejected by the bank of the entity issuing the cheque because there was insufficient money in the entity’s bank account.

Bank fees – These are the expenses that appear on the bank statement and must be taken into account in the company’s accounts.

Interest Amount – When interest is earned on an account, the amount in the bank account is increased.

Errors – Both the bank and the client are capable of making mistakes.

It depends on the reconciling item whether or not an actual entry needs to be made to change the book balance.

The following things don’t need adjustments:

  • Deposit in transit.
  • Insufficient funds.
  • Bank errors.

The following will need adjustments:

  • Earning interest
  • Bank charges
  • NSF cheque s
  • Errors in the books

How Do You Reconcile Bank Statements?

For the purpose of tracking both cash and bank transactions, businesses keep a cash book. The bank entry in the cash book displays the cash at the bank, whereas the cash section in the cash book represents the available cash. The general ledger of a company is contrasted with the account balance as reported by the bank to reconcile a bank statement.

Reconcile Bank Statements

Compare the Transactions

Compare the transactions shown in the company records to those on the bank statement. Have a thorough look at your book. Your expert team of bookkeeping services should compare the debit side of the bank column and the credit side of the bank statement to determine the total of each deposit. Likewise, the bookkeeping team should compare the credit side of the bank column to the debit side of the bank statement. It is a better practice to mark the things that are present in both records.

Adjust the Bank Statements

To reflect the updated balance, adjust the balance on the bank statements. For doing so, you must add unclaimed deposits, and subtract unpaid cheques, and bank errors.

Adjust the Cash Account

After adjusting the bank statement, the next step is to adjust the cash account of the business. You can make adjustments to the business account’s cash balances by increasing interest or decreasing monthly fees and overdraft charges. Businesses must account for bank fees, returned cheques, and accounting errors in order to do this.

Compare the Amounts

The balance should be the same after modifying the balances according to the bank and the books. You will have to go through the reconciliation process once again if they are still not equal. Moreover, businesses must produce journal entries for the modifications to the balance per book once the balances are equal.

Benefits of Bank Reconciliation Statement

  • Bank reconciliation reports are useful resources for identifying fraud.
  • Statements of bank reconciliation also aid in finding mistakes that could harm financial reporting.
  • Financial statements are also helpful in determining profitability because they depict a company’s health for a given time or period.
  • Moreover, healthy reconciliation statements that are accurate give businesses a clear view of their cash flows and enable investors to make well-informed judgments.
  • Without balancing, businesses risk paying taxes that are either too high or too low. Therefore, rectifying discrepancies that influence tax reporting is made easier by reconciling bank statements.
  • You may plan how you gather and spend money by comparing your bank statements to see the pattern from when the money reaches your firm and when it hits your bank account.

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Frequently Asked Questions

How regularly should I reconcile bank accounts?

It is a best practice to reconcile your accounts prior to filing your taxes. It could be monthly or annually, depending on your convenience. However, it will be beneficial for the business if they carry it out more regularly. Weekly intervals are ideal.  It gets harder and takes more time to process if you reconcile at longer intervals.

What are the advantages of a bank reconciliation?

The bank reconciliation process has a number of benefits, such as:
●     Recognizing theft and fraudulent conduct.
●     Identifying problems such as lost payments, multiple payments, calculation errors, etc.
●     Keeping track of and recording bank fines and charges in the books.
●     Maintaining an accurate record of the company’s payables and receivables.

What is the formula for bank reconciliation calculation?

The formula for bank reconciliation is:
(Cash account balance per your records) plus or minus (reconciling items) = (Bank statement balance).

What usual issues do bank reconciliations encounter?

When reconciliations are irregular, it might be challenging to solve issues because the necessary data may not always be accessible. A mismatch might also happen when there is no immediate reporting of transactions and when bank fees and penalties are in effect.

What is the process of account reconciliation?

You should start with the bank’s ending cash balance. Add any deposits that are currently being made from the company to the bank. Also, subtract any cheques pending on the bank. Finally either add or subtract any other due items to complete the basic process of bank reconciliation. The final adjusted bank balance should match the final adjusted cash balance of the business.

Author Details
CPA , The Bookify
I am a Certified CPA with over 20 years in the field of accounting, and I write about how to save time on your taxes and get the most out of your investments.

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