BANK

RECONCILIATION
STATEMENT
THE NATURE OF A BANK
RECONCILIATION STATEMENT

What is a Bank Reconciliation Statement?

A bank reconciliation statement is a summary of banking and business
activity that reconciles an entity’s bank account with its financial
records. The statement outlines the deposits, withdrawals and other
activity affecting a bank account for a specific period. A bank
reconciliation statement is a useful financial internal control tool used to
thwart fraud.

Understanding Bank Reconciliation Statement

Bank reconciliation statements ensure payments have been processed and
cash collections have been deposited into the bank. The reconciliation
statement helps identify differences between the bank balance and book
balance, in order to process necessary adjustments or corrections. An
accountant typically processes reconciliation statements once a month.

Bank Reconciling Statement: Adjusting Balance

per Books
The balance of the cash account in an entity's financial records may require
adjusting as well. For instance, a bank may charge a fee for having the account
open. The bank typically withdraws and processes the fees automatically from
the bank account. Therefore, when preparing a bank reconciliation statement,
any fees taken from the account must be accounted for by preparing a journal
entry.
Another item that requires an adjustment is interest earned. Interest is
automatically deposited into a bank account after a certain period of time.
Thus, the accountant may need to prepare an entry that increases the cash
currently shown in the financial records. After all adjustments are made to the
books, the balance should equal the ending balance of the bank account. If the
figures are equal, a successful bank reconciliation statement has been
prepared.

Related Terms
What Bank Statements Tell Us
A bank statement is a record, typically sent to the account holder every
month, summarizing all transactions in an account during a set time period.
more
What Is an Outstanding Check?
An outstanding check draws on the funds in an individual’s or business’ bank
account, but has not yet been cashed or deposited by the payee. more
Cash Book Definition
A cash book is a financial journal that contains all cash receipts and
disbursements, including bank deposits and withdrawals. more
Petty Cash
Petty cash is a small amount of cash on hand used for paying expenses too
small to merit writing a check. more
Reconciliation Definition
Reconciliation is an accounting process that compares two sets of records to
check that figures are correct and in agreement. more
Account Statement
An account statement is a periodic summary of account activity with a
beginning date and an ending date.
THE COMMON RECONCILING ITEMS
A reconciling item is a difference between balances from two sources that are
being compared. These items are stated in an account reconciliation, so that
the balance from one source is adjusted by reconciling items to arrive at the
balance from the other source. Examples of reconciling items in a bank
reconciliation are deposits in transit and uncashed checks. Some reconciling
items may require adjustment to the records of the recording entity, such as
an uncashed check fee that has been imposed by the entity's bank.

A book balance is the account balance in a company's accounting records. The

term is most commonly applied to the balance in a company's checking
account at the end of an accounting period. An organization uses the bank
reconciliation procedure to compare its book balance to the ending cash
balance in the bank statement provided to it by the company's bank.

The bank and book balances are almost never the same, which most
commonly calls for the adjustment of the book balance to conform to the
information in the bank statement. The following reconciling items commonly
arise as part of a bank reconciliation, and require the adjustment of the book
balance:

Interest earned. This amount is recorded in the bank statement, and must be
added to the company's book balance.
Service charges. These amounts are charged by the bank for its services in
maintaining the checking account, and must be added to the company's book
balance. This may also include a fee for supplying check stock to the company.
Adjustments to deposits. The company may sometimes record a deposit
incorrectly, or it may deposit a check for which there are not sufficient funds.
If so, and the bank spots the error, the company must adjust its book balance
to correct the error.
Adjustments to checks. The company may occasionally record a check
incorrectly. If so, and the bank spots the error, the company must adjust its
book balance to correct the error.
On rare occasions, the bank will have made an error instead, in which case the
bank corrects its records and the company's book balance is not adjusted.

THE EFFECTS OF THE RECONCILING ITEMS

In bank reconciliation, the bank statement balance is reconciled, with the
book bank account balance in the client’s books of accounts, resulting to the
tallying of the two balances, where the calculated adjusted bank balance
should be equal to the figure of the adjusted book bank balance. It involves a
structured process of preparation, where forms, which contain pre-printed
items, should leave out omission errors and are found on the back side of the
hard copies of your monthly bank statement, making the entire process easier.
However, this process also has its own set of drawbacks that should be looked
into. Here are the advantages and disadvantages of bank reconciliation:

List of Advantages of Bank Reconciliation

1. It makes accounts to be in good standing.
Keeping your account in good standing through bank reconciliation means
that, when you are aware about the amount that you can spend in your
account, you are less likely to overdraw the account, which means
withdrawing or attempting to withdraw more money than what your account
have. Keep in mind that overdrawing will negatively affect your credit score
and can prompt the bank to charge you fees. While some financial institutions
offer overdraft protection, most often they would charge you or your company
a fee for using such a service. And if you do not have such type of protection
on your account, you will suffer worse consequences.
Company prepares a bank reconciliation to determine its actual cash balance.
It prevents theft.
As you are going to compare your bank book’s transactions with the bank’s
financial transactions, you will be able to spot transactions that are recorded
by the institution, but are not in your records. As you can see, recording bank
fees is a standard practice as you process your reconciliation, though it might
a transaction that you have overlooked to record. By examining further the
available original documents, these discrepancies will be revealed. Most
importantly, this will reveal bank transactions that were initiated by
unauthorized individuals who try to steal money from your account.

3. It will keep mistakes at bay.

You will know that a bank is reliable when it implements procedures to avoid
making mistakes in your account, but unfortunately, mistakes do happen
sometimes, with the most common being a simple entry error. Nevertheless,
banks will be able to correct these mistakes when you point them out after
you complete your reconciliation.

4. It helps you detect accounting errors.

By reconciliation, you will be able to detect accounting errors that commonly
occurs in business, such as double payments, addition and subtraction errors,
missed payments and lost checks. For example, if you have mistakenly
recorded an invoice as “paid” on your ledger, bank reconciliation can reveal
that you have forgotten to write the check. There are also cases where your
bank committed an error in your favor, so you will be liable to return that
money, even if you have already spent it.

5. It achieves accurate balance.

A bank reconciliation will reveal which cash transactions have been cleared
with the bank and which of those are still outstanding. While a check is the
most common form of transaction that would remain open at the end of the
statement period, the bank may not clear it as of the ending date of the
statement if you made a deposit at the end of the month.

List of Disadvantages of Bank Reconciliation

1. It can create checks that clear the bank after being voided.
As you may have noticed when making check transactions with your bank, if a
check has remained “un-cleared” for a long period of time, you might have to
void it and issue one for a replacement. Now, if a payee has cashed the original
check that you have voided with the bank, the institution should reject it when
the payee presents it. However, if you failed to void it, then it must be
recorded with a credit to your cash account and a debit that indicates the
reason for the payment, such as a decrease in a liability account, an increase in
a cash a with the bank at ounce if the payee has not yet cashed the
replacement check, or you will be making a double payment that will require
you to pursue repayment with the payee for the second check.

2. It can issue un-cleared checks that continue not to be presented.

As stated above, a bank reconciliation creates un-cleared checks, which are
residual checks that are not presented for payment for a long period of time or
are never presented for payment at all. That is why you should treat them
similarly as other un-cleared checks even if it is just in a short term, with you
keeping them in the listing of un-cleared checks in your accounting to make
them as ongoing reconciling items. In the long term, you should ask the payee
if he/she ever received the checks to decide whether you need to void them
and issue new ones.

3. It risks changes in the dates covered by the bank statement.

Another drawback with bank reconciliation that can cause problems is that
bank statement dates can be altered in order to include or exclude some
items. This situation can arise when someone at your company requests the
bank to change the closing date for your bank account, which can lead to
fraud.

4. It makes possible that deposited checks will be returned.

In some cases, your bank would refuse to deposit your check for reasons like
you have drawn it on a foreign bank account. This means that you need to
reverse the original entry on that deposit, which will become a credit to your
cash account to reduce cash balance. Remember that this comes with a
corresponding increase in your accounts receivable account.

5. It risks having missing transactions.

Bank reconciliations can have missing transactions. This can be caused by
transactions that have been modified while reconciliation is still on process or
transactions that have been reconciled in another method of reconciliation.

PREPARE BANK RECONCILIAATION STATEMENT

In accounting, cash includes coins; currency; undeposited negotiable
instruments such as checks, bank drafts, and money orders; amounts in
checking and savings accounts; and demand certificates of deposit. A
certificate of deposit (CD) is an interest-bearing deposit that can be
withdrawn from a bank at will (demand CD) or at a fixed maturity date (time
CD). Only demand CDs that may be withdrawn at any time without prior
notice or penalty are included in cash. Cash does not include postage stamps,
IOUs, time CDs, or notes receivable.
Most companies use checking accounts to handle their cash transactions. The
company deposits its cash receipts in a bank checking account and writes
checks to pay its bills. Keep in mind, a bank account is an asset to the company
BUT to the bank your account is a liability because the bank owes the money
in your bank account to you. For this reason, in your bank account, deposits
are credits (remember, liabilities increase with a credit) and checks and other
reductions are debits (liabilities decrease with a debit).
The bank sends the company a statement each month. The company checks
this statement against its records to determine if it must make any corrections
or adjustments in either the company’s balance or the bank’s balance. A bank
reconciliation is a schedule the company (depositor) prepares to reconcile, or
explain, the difference between the cash balance on the bank statement and
the cash balance on the company’s books. The co e and prepare any entries to
correct the cash balance in the ledger.
Bank Statement
A bank statement is a record of your bank account transactions, typically for
one month, prepared by the bank. A bank statement looks like this:

First Bank
Virginia Beach, VA
Customer:
My Company
1111 Statement Date
College September 30
Way
Virginia Beach, VA
September 1 Beginning Balance $16,850
+ Deposits and other Credits $22,367
– Checks and other Debits ($11,822)
September 30
ENDING BALANCE $27,395

Deposits and Other Credits

1-Sep $1,500 25-Sep $10,000
15-Sep $2,514 29-Sep $4,500
16-Sep $350 Interest $3
20-Sep $500 CM $3,000
Total Deposits $22,367
Checks and Other
Debits
2001 9/1 $750
2002 9/5 $980
2003 9/5 $275
2005 9/10 $5,843
2006 9/15 $333
2007 9/21 $480
2010 9/28 $2,571
2011 9/28 $235
SC 9/30 $5
NSF 9/18 $350
Total
Checks $11,822

Notes:
CM is for collection of a note. Note was for $3500 but bank charged a $500
collection fee.
SC is for bank service charges.
NSF is for customer payment that could not be funded due to Non-Sufficient
Funds.

This bank statement is an example of the transactions that occurred during

the month. In the Deposit and credits section, you see the deposits made into
the account and a CM which is a collection of a note (see note at bottom of
statement) and interest the bank has paid to your account. In the Checks and
debits section, you see the individual checks that have been processed by the
bank and you also see SC for a bank service charge on your account as well as
a NSF (stands for Non-Sufficient Funds) and means we made a deposit from a
customer but the customer did not have enough money to pay the check
(bounced check).

Company’s Records
The company’s records (or books) refers to the general ledger posting and can
be in the form of cash disbursement journal, cash receipt journal, cash general
ledger postings or lists of cash transactions. An example of a cash listing is:
My Company’s Records
Sept 1
Cash
Balance $16,850
Deposits:
1-Sep $1,500
14-Sep $2,514
15-Sep $350
20-Sep $500
24-Sep $10,000
30-Sep $6,700
Total Deposits $26,064

Checks:
2001 1-Sep $750 Payroll
2002 5-Sep $980 Rent
2003 5-Sep $275 Supplies
2004 8-Sep $1,000 Inventory
2005 10-Sep $5,483 Equipment
2006 15-Sep $333 Supplies
2007 20-Sep $480 Inventory
2008 20-Sep $650 Payroll
2009 22-Sep $200 Postage
2010 28-Sep $2,571 Sales Commissions
2011 28-Sep $235 Utilities
2012 30-Sep $5,500 Equipment
Total
Checks ($18,457)
 Sept 30
Cash
Balance $24,457
The bank balance on September 30 is $27,395 but according to our records,
the ending cash balance is $24,457. We need to do a bank reconciliation to
find out why there is a difference.

Bank Reconciliation
A bank reconciliation compares the bank statement and our company’s
records and reconciles or balances to two account balances. How does it do
this? There are several items of information we can get by comparing the
bank statement to our records — anything that doesn’t match or doesn’t exist
on both places is called a reconciling item. A reconciling item will be added or
subtracted to the bank or book side of the reconciliation. The following table
will give you some examples of how these reconciling items apply in a bank
reconciliation:

Bank Reconciliation
Ending Cash Balance per Bank Ending Cash Balance per Books
Add: Deposits in Transit Add: Note Collections
Add: Interest
Subtract: Subtract:
Outstanding Checks Customer NSF

Subtract:
Bank Service Fees
Add/Subtract Bank Add/Subtract Book
Errors errors
= Adjusted Bank = Adjusted Book
Balance Balance
Deposits. Compare the deposits listed on the bank statement with the deposits
on the company’s books. To make this comparison, place check marks in the
bank statement and in the company’s books by the deposits that agree. Then
determine the deposits in transit. A deposit in transit is typically a day’s cash
receipts recorded in the depositor’s books in one period but recorded as a
deposit by the bank in the succeeding period. The most common deposit in
transit is the cash receipts deposited on the last business day of the month.
Normally, deposits in transit occur only near the end of the period covered by
the bank statement. For example, a deposit made in a bank’s night depository
on May 31 would be recorded by the company on May 31 and by the bank on
June 1. Thus, the deposit does not appear on a bank statement for the month
ended May 31. Also check the deposits in transit listed in last month’s bank
reconciliation against the bank statement. Immediately investigate any
deposit made during the month but missing from the bank statement (unless
it involves a deposit made at the end of the period).

Paid checks. If canceled checks (a company’s checks processed and paid by the
bank) are returned with the bank statement, compare them to the statement
to be sure both amounts agree. Then, sort the checks in numerical order. Next,
determine which checks are outstanding. Outstanding checks are those issued
by a depositor but not paid by the bank on which they are drawn. The party
receiving the check may not have deposited it immediately. Once deposited,
checks may take several days to clear the banking system. Determine the
outstanding checks by comparing the check numbers that have cleared the
bank with the check numbers issued by the company. Use check marks in the
company’s record of checks issued to identify those checks returned by the
bank. Checks issued that have not yet been returned by the bank are the
outstanding checks. If the bank does not return checks but only lists the
cleared checks on the bank statement, determine the outstanding checks by
comparing this list with the company’s record of checks issued. Sometimes
checks written long ago are still outstanding. Checks outstanding as of the
beginning of the month appear on the prior month’s bank reconciliation. Most
of these have cleared during the current month; list those that have not
cleared as still outstanding on the current month’s reconciliation.
Bank debit and credit memos. Verify all debit and credit memos on the bank
statement. Debit memos reflect deductions for such items as service charges,
NSF checks, safe-deposit box rent, and notes paid by the bank for the
depositor. Credit memos reflect additions for such items as notes collected for
the depositor by the bank and wire transfers of funds from another bank in
which the company sends funds to the home office bank. Check the bank debit
and credit memos with the depositor’s books to see if they have already been
recorded. Make journal entries for any items not already recorded in the
company’s books.

Bank Errors. Sometimes banks make errors by depositing or taking money

out of your account in error. You will need to contact the bank to correct
these errors but will not record any entries in your records because the bank
error is unrelated to your records.

Book Errors. List any Book errors. A common error by depositors is recording
a check in the accounting records at an amount that differs from the actual
amount. For example, a $47 check may be recorded as $74. Although the check
clears the bank at the amount written on the check ($47), the depositor
frequently does not catch the error until reviewing the bank statement or
canceled checks.

Deposits in transit, outstanding checks, and bank service charges usually

account for the difference between the company’s Cash account balance and
the bank balance

After comparing the bank statement and records of My Company, you should
have identified the following reconciling items:
Deposit in transit dated 9/30 for $6,700.
Outstanding checks #2004, 2008, 2009, 2012.
Interest paid by the bank $3.
Note collected by bank $3500 less $500 fee
Bank service charge $5
Customer NSF $350
Error in Check #2005 correctly processed by bank as $5,843 but recorded in
our records as $5,483. This is a difference of $360 (5,843 – 5,483) and since
we did not take enough cash we need to reduce cash by $360.
Using the chart provided above and the reconciling items, the bank
reconciliation would appear as follows:

My Company
Bank Reconciliation
September 30
Ending Bank Balance $27,395 Ending Book Balance $24,457
Add: 9/30 Deposit 6,700 Add: Interest 3
Note Collected 3,000 3,003
Subtract:
O/S Cu #2004 1,000 Subtract:
# 2008 650 Bank Fee 5
# 2009 200 Customer NSF 350
# 2012 5,500 CK 2005 Error 360
– 7,350 – 715
Adjusted Bank Balance $26,745 Adjusted Book Balance $26,745
When the bank and book are in agreement, you are almost finished. On the
bank side of the reconciliation, you do not need to do anything else except
contact the bank if you notice any bank errors. On the book side, you will
need to do journal entries for each of the reconciling items.

Adjusting Entries for Book side Reconciling Items

The good news is every entry will contain CASH. If we added to the book side
in the bank reconciliation, we will DEBIT cash. If we subtracted to the book
side in the bank reconciliation, we will CREDIT cash. The journal entries for
the books side of My Company are:

Debit Credit
(1) Cash 3
Interest Revenue 3
To record interest received from bank.
(2) Cash 3,000
Collection Fee 500
Notes Receivable 3,500
To record collection of note and fee by bank.
(3) Bank Service Fees 5
Cash 5
To record bank fees charged by bank.
(4) Accounts Receivable 350
Cash 350
To record Customer NSF from the bank.
(5) Equipment 360
Cash 360
To correct recording error on check #2005.
These entries are posted to the general ledger accounts. The cash general
ledger account would be:

Account: Cash Debit Credit Balance

Beginning Balance 16,850
Deposits 26,064 42,914
Checks 18,457 24,457
(1) Interest earned 3 24,460
(2) Note collected 3,000 27,460
(3) Bank Service Fee 5 27,455
(4) Customer NSF 350 27,105
(5) Error Correction 360 26,745
The ending cash balance on the general ledger is reconciled to the adjusted
bank statement balance.

When a company maintains more than one checking account, it must reconcile
each account separately with the balance on the bank statement for that
account. The depositor should also check carefully to see that the bank did not
combine the transactions of the two accounts.

Within the internal control structure, segregation of duties is an important

way to prevent fraud. One place to segregate duties is between the cash
disbursement cycle and bank reconciliations. To prevent collusion among
employees, the person who reconciles the bank account should not be
involved in the cash disbursement cycle. Also, the bank should mail the
statement directly to the person who reconciles the bank account each month.
Sending the statement directly limits the number of employees who would
have an opportunity to tamper with the statement.
Members
Rose Ann Cantre
Janeth Protacio
Jerrymae Cao
Jamella Cano

12 – Capricorn
ACCOUNTING 2