Bank Reconciliation
We will learn the purpose of bank reconciliation, identify and adjust for the various differences between the bank statement and the cash at bank balance, understand the steps involved in reconciling the cash at bank account with the bank statement, update the cash at bank account accordingly, and prepare a bank reconciliation statement.
Related Lessons:
Purpose of Bank Reconciliation
Bank reconciliation is an internal control process in which a business compares the details in its cash at bank account with the bank statement received from the bank.
Bank reconciliation is carried out regularly, usually on a monthly basis, to ensure that the cash at bank account is up to date and free from errors. It is also performed to help detect and prevent fraud or theft within the business.
Adjusting for Differences
While performing the bank reconciliation, the following are common adjustments that you encounter:
Recorded in bank statement but not in cash at bank account
To adjust, update the cash at bank account with the missing transaction.
Recorded in cash at bank account but not in bank statement
To adjust, record the missing transaction in the bank reconciliation statement.
Not recorded in bank statement and cash at bank account
To adjust, update the cash at bank account and record the missing transaction in the bank reconciliation statement.
Wrong amount is recorded in the cash at bank account
To adjust, update the cash at bank account with the difference in amount.
Wrong amount is recorded in the bank statement
To adjust, record the difference in amount in the bank reconciliation statement.
Wrong amount is recorded in the bank statement and cash at bank account
To adjust, update the cash at bank and record in the bank reconciliation statement with the difference in amount.
Format of Bank Reconciliation Statement
To prepare the bank reconciliation statement, we start with the header which indicates the date (in day, month and year format) that this statement represents.
The first item in the statement is “Balance as per bank statement“. Here, we state the final balance figure as shown in the bank statement.
Followed by “Add Deposit in transit“. Amount received that was recorded in the cash at bank account but not in the bank statement are listed here. The total amount is added to the balance above.
Next is “Less Payment in transit“. Amount paid that were recorded in the cash at bank account but not in the bank statement are listed here. The total amount is deducted from the bank balance.
Any errors found in the bank statement will be recorded next and indicated as an “Error“.
The final item in the statement is “Balance as per updated cash at bank account“. This amount should be the same as the updated cash at bank account.
Steps to Bank Reconciliation
Bank reconciliation is performed with the following steps:
Step 1:
Cross out similar transactions recorded in the bank statement and the cash at bank account
Step 2:
Identify errors that might be present in the bank statement and the cash at bank account.
Step 3:
Update the cash at bank account for transactions that appear in the bank statement but have not yet been recorded in the cash at bank account, as well as for any errors identified in the cash at bank account.
Step 4:
Prepare the bank reconciliation statement with transactions that are recorded in the cash at bank account but have yet to be recorded in the bank statement, as well as any errors identified in the bank statement.