A bank reconciliation statement is a statement that reconciles companies financial record with a bank account. Depending on the volume and value of bank transactions, the reconciliation is done either daily, weekly, or monthly. If the volume or value of transactions is higher in nature then reconciliation activities are carried out on a daily basis to mitigate the risk of payment or cheque bounce. It also helps in detecting fraud and cash manipulations in the Company.
Steps for Preparation of Bank Reconciliation Statement
The bank reconciliation statement identifies the transactions individually and matches them with the bank statement in such a way that the closing balance of the bank in books matches with the bank statement. When the same is not matched, certain adjustments or corrections will be made in the books to match it.
The stepwise procedure for preparation of a Bank reconciliation statement is as follows:
- First, we need to compare the list of issued cheques and deposits to the cheques shown in the statement to identify uncleared cheques and deposits in transit.
- Add deposits in transit to the cash balance shown in the bank statement. Thereafter, deduct any outstanding cheques. This way we will get the adjusted bank cash balance.
- Add any interest earned to the business ending cash balance.
- Reduce bank service fees, penalties etc. This will provide the adjusted company cash balance.
After reconciliation, the adjusted bank balance will match with the companies ending adjusted cash balance.
Major Reasons for Difference Between Bank Statement and Company’s cash statement
Major reasons for the difference between Bank Statement and Companies cash statement are:
- Cheques deposited but not yet collected: Cheques are deposited due to which cash balance at cash book will increase but bank balance will increase only when the said cheque will be cleared by banks and recorded in their statement.
- Deposits in transit: Cash and cheques that have been received and recorded by the company but have not yet been recorded on the bank statement.
- Cheques issued but not presented for payment: Cheques that have been issued by the company to creditors but the payments have not yet been processed. This will lead to reduction in cash book balance with the amount of cheque issued while bank balance will reduce only when the same is cleared by the bank.
- Error committed by the accountant in recording transactions: When an error is occurred by an accountant in recording transactions like totalling is wrong or cheque deposited but not recorded in companies cash book.
- Bank service fees: Banks deduct charges for services they provide to customers but the same has not been recorded in the books of companies.
- Interest income: Banks pay interest on some bank accounts but the same has not been recorded in cash book of the organisation.
In today’s world, many companies are using specialized accounting software for bank reconciliation in order to reduce the amount of work and adjustments required and to enable real-time updates.