Bank Reconciliation Overview and Explanation

What is bank reconciliation?

A bank reconciliation is a process used to compare and reconcile the balances in a company's internal accounting records with the corresponding balances in its bank account. The purpose of this process is to ensure that the company's financial records accurately reflect the transactions that have occurred in its bank account.

The process begins by comparing the bank statement, which is a record of all transactions that have occurred in the bank account during a certain period of time, with the company's own records of transactions that have been entered into its accounting system. Any discrepancies or differences between the two sets of records are then identified and investigated.

Common causes of discrepancies include errors in data entry, unrecorded transactions, or transactions that have been recorded in the wrong period. Once the discrepancies have been identified and resolved, the company's financial records are updated to reflect the correct balances in its bank account.

The bank reconciliation process is a critical step in ensuring the accuracy and integrity of a company's financial records. It helps to detect and prevent errors, fraud, and other financial irregularities, and helps to ensure that the company's financial statements are accurate and reliable.

The bank reconciliation process

The bank reconciliation process typically follows these steps:

Obtain the bank statement: The company receives its bank statement from the bank, which shows all transactions that have occurred in the bank account during a certain period of time.

Compare the bank statement to the company's records: The company compares the bank statement to its own records of transactions that have been entered into its accounting system. Any discrepancies or differences between the two sets of records are identified.

Investigate and resolve discrepancies: The company investigates the discrepancies and determines the cause. Common causes include errors in data entry, unrecorded transactions, or transactions that have been recorded in the wrong period.

Update the company's records: The company updates its financial records to reflect the correct balances in its bank account. This may include adjusting the company's records to reflect transactions that were not recorded, or correcting errors in data entry.

Prepare a reconciliation statement: The company prepares a reconciliation statement, which shows the beginning balance, all transactions, and the ending balance of the bank account.

Review and approve the statement: The company's management reviews and approves the reconciliation statement, ensuring the accuracy and completeness of the reconciliation process.

File and retain the statement: The company files and retains the reconciliation statement for future reference and audits.

Repeat the process: The bank reconciliation process is typically performed on a regular basis, such as monthly, to ensure the accuracy and integrity of the company's financial records

Bank reconciliation terms

There are several key terms and concepts related to bank reconciliation:

Bank statement: A record of all transactions that have occurred in a company's bank account during a certain period of time, provided by the bank to the company.

Deposits in transit: Deposits that have been made by the company but have not yet been recorded on the bank statement.

Outstanding checks: Checks that have been written by the company but have not yet been cleared by the bank.

Bank charges: Fees or charges imposed by the bank, such as service charges, interest, or penalties.

Interest earned: Interest earned on the company's bank account, which may be recorded in the company's records but not yet reflected on the bank statement.

Unrecorded deposits: Deposits that have been made to the company's bank account but have not yet been recorded in the company's records.

Unrecorded withdrawals: Withdrawals from the company's bank account that have not yet been recorded in the company's records.

Cleared checks: Checks that have been written by the company and have been cleared by the bank, resulting in a decrease in the company's bank account balance.

Beginning balance: The starting balance of the company's bank account, as recorded in the company's records.

Ending balance: The final balance of the company's bank account, as recorded in the company's records after all transactions have been reconciled.

Problems with Bank Reconciliations

There are several common problems that can occur during the bank reconciliation process:

Errors in data entry: Incorrect data entry can lead to discrepancies between the company's records and the bank statement. This can be caused by typos, transposing numbers, or entering the wrong date.

Unrecorded transactions: Transactions that have not been recorded in the company's records, such as deposits or withdrawals, can lead to discrepancies between the company's records and the bank statement.

Transactions recorded in the wrong period: Transactions that have been recorded in the wrong period, such as in the wrong month or year, can lead to discrepancies between the company's records and the bank statement.

Bank charges or fees not recorded: Bank charges or fees that are not recorded in the company's records can lead to discrepancies between the company's records and the bank statement.

Outstanding checks: Outstanding checks that have not yet been cleared by the bank can lead to discrepancies between the company's records and the bank statement.

Incorrectly recorded transactions: Transactions that have been recorded incorrectly in the company's records, such as recording a debit as a credit or vice versa, can lead to discrepancies between the company's records and the bank statement.

Fraud or embezzlement: Fraud or embezzlement can lead to discrepancies between the company's records and the bank statement.

Lack of proper documentation: Lack of proper documentation can make it difficult to reconcile the company's records and the bank statement, and can make it difficult to identify the cause of discrepancies.

Not reconciling often: Not reconciling often enough can cause discrepancies to accumulate over time, making it more difficult to resolve discrepancies and correct errors.

Lack of proper training: Lack of proper training can make it difficult for employees to understand the bank reconciliation process, leading to errors and discrepancies.

Example of a Bank Reconciliation

Company Name: Countingaccounting.inc

Bank Reconciliation for the month of January:

Bank Statement:

Beginning balance: $10,000

Deposits: $5,000

Checks written: $3,000

Bank charges: $50

Interest earned: $100

Ending balance: $11,050

Company Records:

Beginning balance: $10,000

Deposits: $4,500

Checks written: $2,500

Bank charges: $75

Interest earned: $75

Ending balance: $11,100

Discrepancies:

Deposits: $500 (Company Records: $4,500, Bank Statement: $5,000)

Checks written: $500 (Company Records: $2,500, Bank Statement: $3,000)

Bank charges: $25 (Company Records: $75, Bank Statement: $50)

Interest earned: $25 (Company Records: $75, Bank Statement: $100)

Ending balance: $50 (Company Records: $11,100, Bank Statement: $11,050)

Reconciliation:

Deposits: An additional deposit of $500 was recorded in the bank statement but not in the company's records. This deposit will be added to the company's records.

Checks written: An additional check of $500 was written and recorded in the bank statement but not in the company's records. This check will be added to the company's records.

Bank charges: The bank charged $25 more than what was recorded in the company's records. This charge will be added to the company's records.

Interest earned: The bank earned $25 more interest than what was recorded in the company's records. This interest will be added to the company's records.

Ending balance: The company's records show a higher ending balance than the bank statement. After reconciling all the discrepancies, the company's records will be adjusted to match the bank statement's ending balance.

Description	Company Records	Bank Statement	Adjustment
Beginning balance	$10,000	$10,000
Deposits	$4,500	$5,000	+$500
Checks written	$2,500	$3,000	+$500
Bank charges	$75	$50	-$25
Interest earned	$75	$100	+$25
Ending balance	$11,100	$11,050	-$50