Understanding bank reconciliations

A company has two records of its financial transactions – one is its bank statement and the other is the bank balance as per the company’s accounting records. Sometimes, you will find that these two statements may not match. A bank reconciliation statement attempts to clarify and support the difference between the above by giving credible reasons.

There can be many reasons for discrepancies in these two statements. One of the most common reasons is the timing. Some transactions may reflect much later in the bank statement especially if a check has been cashed much later though it may reflect earlier in the company’s own accounting records. A bank reconciliation statement takes this into account while reconciling the items. This statement not only helps take care of any accounting or reporting errors, but also gives you an exact float balance. Float is the difference between checks issued and checks cashed. However, we recommend not using float for cash flow purposes.

Why is bank reconciliation done?

  • As pointed earlier, bank reconciliation helps in identifying any accounting errors between the records of the company and the bank.
  • Bank reconciliations help in ensuring that cash is properly accounted for. Being liquid, cash is often vulnerable. There is a scope of irregularities in depositing or withdrawing cash. It is important to keep strict tabs on accounting all cash transactions correctly.
  • Gives you visibility on your float balance.
  • Monthly bank reconciliation helps to monitor the cash flows of the company and also helps in preparing accurate account statements later.

Preparing a Bank Reconciliation Statement:

It is important to account for all the possible entries like checks in transit, deposits in transit and others while preparing the reconciliation statement. Special attention must be made to the following:

These may sometimes be accounted for by the company but not by the bank statement:

Outstanding checks: It is possible that checks issued and accounted for by the company have not yet been deposited and hence may be missing from the bank statement at the end of the month.

Deposits in transit: It is possible that certain deposits have been accounted by the company immediately but have not been accounted for by the bank till it processes payment. Therefore, any outstanding deposits must be subtracted from the balance as per cash book in the bank reconciliation statement. These are often accounted for by the bank but not the company:

Service charges: These are the charges levied by the bank on certain transactions. These are generally not accounted for by the company in advance.

Interest income: This again may be missing from the company’s cash account. This generally is any interest earned on the deposits maintained in the bank.

NSF checks: These are “not sufficient funds” checks that may have been deposited in the bank but not honored due to lack of sufficient funds. These need to be accounted for separately while preparing the bank reconciliation statement.

That’s why it’s good accounting practice to do bank reconciliations at regular intervals preferably every month.

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