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What is Bank Reconciliation? How Does It Work?

IndianMoney.com Research Team | Posted On Monday, January 13,2020, 05:49 PM

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What is Bank Reconciliation? How Does It Work?

 

 

What is Bank Reconciliation?

Bank reconciliation is the process by which a company ensures that its financial records like ledger, balance sheet and so on are correct. The records of the company figures are compared with those of the bank statement figures. If there are no differences between the two, accountants declare that the bank statement is reconciled.

The closing balance of a company’s cash transactions are called the book balance, and those of the bank are called the bank balance. It is highly possible that there could be a difference between the two. In such cases, your company records must be adjusted after tracking down the differences. Otherwise, there will be a huge misconception on the amount of money you really have, and the amount you think you have, at the bank.

Bank reconciliation is beneficial to check if any customer cheques have bounced, or if any cheques you issued were stolen, altered or encashed without your knowledge.

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See Also: Basics of Financial Planning

What is Bank Reconciliation? How Does It Work?

  • Bank Reconciliation Procedure

Bank statements are received at the end of each month. After receiving them, follow these steps to reconcile a bank statement:

  1. Compare the deposits: Compare the deposits in the business records with those at the bank. Compare the deposits on the debit side of the bank column of cash book with credit side of the bank statement, and compare the credit side of the bank column with the debit side of the bank statement.
  2. Adjust bank statements: Balance on the bank statements must be adjusted with the corrected balance. This includes three steps: add deposits in transit, deduct outstanding cheques, add/deduct any bank errors.
  3. Deposits in transit are transactions recorded in business, but not at the bank. Outstanding cheques are those that are written in the cash statement of the business but have not been cleared by the bank. Bank errors are mistakes made by the bank while issuing the statement. It might include wrong entries, omitting an amount and so on.
  4. Adjust the cash account: Once you are done adjusting the bank statements, the next step is to adjust the cash balance of the business. Adding interest, deducting monthly charges and so on are important steps to be taken care of. To adjust the cash statements there are certain things you must not leave behind. These are:
  • Bank charges: There will be monthly service charges from banks for the process of business checking activity. This must be reduced from the cash accounts. If you have earned any interest on the business bank accounts, it must be added to the cash account.
  • Not sufficient fund (NSF): These are cheques not rejected by a bank due to insufficient bank balance. Such cheques must be deducted from the cash account, as it is not deposited in your bank account.
  • Errors in cash account can be the entering or omission of an incorrect amount. Correcting this could result in the increase or decrease of the cash account.
  1. Compare the balances: After the balances of bank and books are adjusted, compare them. If they are equal, then you are done with the process of reconciliation. If not, you must follow the above mentioned steps of reconciliation.
  • Purpose of bank reconciliation

See Also: 6 Reasons Why People Fail in Financial Planning! How to Overcome?

Bank reconciliation has many advantages for the smooth functioning of a business. They are:

  • Keeping a track of accounts payable and receivables of the business.
  • Fraud transactions and theft can be easily tracked down.
  • Detecting errors like calculation errors, double payments, missed payments lost cheques and much more.
  • Adding bank fees and interest in the books.
  • Transaction updates can be tracked easily. Cheques that are not encashed can be realized. You can urge the payee to encash the check.

Bank reconciliation example

A company XYZ has a cash book balance of Rs 1,050 as on 31st March 2018. As per the bank statements, the balance is Rs 1,000. Following are the additional details:

1. A cheque of Rs 300 was deposited, but not collected by the bank.

2. Bank charges of Rs 50 were recorded in the passbook, but not in the cashbook.

3. Check of Rs 200 was issued, but not present for payment.

4. Bank interest Rs 100 was recorded in the passbook, but not in the cash book.

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Bank reconciliation statement of company XYZ is given below:

Particulars

Amount

Amount

Balance as per passbook

 

1,000

(+) cheque deposited, but not collected

300

 

Bank charges not recorded in the cash book

50

350

(-) cheque issued, but not presented for payment

200

 

Bank interest received unrecorded in cash book

100

(300)

Balance as per cashbook

 

1050

  • Best time to reconcile

Most of the companies reconcile bank statements on a monthly basis. If you are a larger organization, it is better to reconcile more often. There are companies that reconcile daily to avoid complications.

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