Accounting Principles and Concepts

Bank Reconciliation: An Overview

Your business always has the exact same amount of cash on hand that its financial reports, like its balance sheet, say, right? Shockingly, that is often not the case. In this article, we’ll simply explain how a bank reconciliation might reveal not only the missing amount but also the way it could have flown out of the company’s register—read on to find out everything.

What exactly is meant by a "bank reconciliation"?

A document known as a bank reconciliation statement is one that makes a comparison between the cash balance shown on the balance sheet of a company and the amount that appears on its bank statement. When two accounts are reconciled, it is easier to determine whether there should be changes made to the accounting system for improved accuracy.

In order to guarantee that the company's cash records are accurate, regular bank reconciliations are performed at predetermined intervals. Such checks also assist in the detection of any fraudulent activities or cash manipulations.

The Differences Between The Bank Statement And The Company's Accounting Record And Why They Occur

When banks forward bank statements that detail companies' beginning cash balance, transactions that occurred during the period, as well as the ending cash balance, the ending cash balance on the bank's side and the one on the company's side almost always differ from one another.

The following are some of the reasons for the difference between books and bank accounts:

  • Deposits underway: Cash and checks that have come in and been administrated but have not yet been recorded on the bank statement are referred to as "unrecorded cash and checks."
  • Checks that have been written by the company to pay its creditors but for which payment has not yet been processed are referred to as outstanding checks.
  • Service fees charged by banks: Customers' accounts are debited in an amount equal to the cost of the bank's services, but these costs are typically not very high.
  • Earnings from interest are possible on some bank accounts because banks pay interest on those accounts.
  • Checks that are returned due to insufficient funds are referred to as "not sufficient funds" (NSF) checks. This occurs when a customer deposits a check but does not have sufficient funds to pay it. In this case, the bank deducts the amount of the check that was previously credited to the customer's account. After that, the depositor receives the check back with the not sufficient funds notation attached to it.

Bank reconciliation is currently performed by a significant amount of businesses using specialized accounting software, such as Wafeq, to cut down on the amount of work and adjustments that must be performed and to enable real-time updates.

The Process of Reconciling Bank Accounts

  1. When reviewing the bank statement, compare the company's issued checks and deposits to those shown on the statement in order to detect all that remain uncashed or are still in the process of being processed.
  2. Add any deposits that are still being processed to the cash balance that is shown on the bank statement.
  3. Deduct the amount of any checks still outstanding.
  4. This will provide the revised total cash available in the bank.
  5. The following step is to take the company's ending cash balance, add any interest that was earned, and then add the number of notes receivable.
  6. Deduct any bank service fees, penalties, and non-sufficient funds checks from the total amount. The result of this is going to be the revised cash balance for the company.
  7. Following the completion of the reconciliation, the adjusted bank balance and the company's ending adjusted cash balance should be identical.

Bank Reconciliation Example

As ABC company prepares to close its books, it is required to complete a bank reconciliation for the following items:

  • On February 28, 2018, the bank statement showed an ending balance of SAR 600,000, whereas the company's ledger shows an ending balance of SAR 521,800.
  • The service fee for maintaining the account comes to SAR 200, as shown on the bank statement.
  • A total of SAR 40 in interest income is shown on the bank statement.
  • ABC has written checks totaling SAR 100,000, but the bank has not yet validated or cleared them.
  • There was a deposit of SAR 40,000 made by ABC, but this was not reflected on the bank statement.
  • In the cash payments journal, the incorrect amount of SAR 740 was recorded for a check that had been written out to the office supplier for the amount of SAR 940.
  • The bank was successful in collecting a note receivable worth SAR 19,600.
  • The company lost SAR 1,040 because a check it deposited was returned to it as non-sufficient funds.

Statement Of Reconciliation With The Bank

After registering the journal entries for the company's accounting adjustments, a bank reconciliation statement ought to be produced to reflect all of the changes to cash balances for each month.

This statement should be produced in order to fulfill regulatory requirements. Auditors will use this statement as a reference when conducting year-end auditing procedures on the company.

Bank Reconciliation is a seemingly redundant but actually crucial task that every company and account should consider due diligence. Without it, businesses could potentially miss fraudulent activities, accounting malpractice, or the two together, which may result in terrible financial consequences.

If you want to know all the necessary steps for preparing and analyzing a balance sheet before the reconciliation, check out our related article about Accounting Equation.