Bank reconciliation

• Bank Reconciliation


  The process of comparing the bank statement received from the bank with the accounting records/book of the company

  
• Bank Reconciliation Statement


  A report which compares the bank balance as per company's accounting records with the balance stated in the bank statement
• Common causes of discrepancy in figures


  • Time log or Timing differences
  • Errors
• Time log or Timing differences


  Transactions recorded by the bank before it was recorded in the accounting books or vice versa
• Errors


  Erroneous entry in their books by either the bank or the company's accountant
• Importance of Bank Reconciliations


  • Identification of errors in the accounting records of the company or the bank
  • Provide control mechanism to help protect valuable resources through uncovering irregularities
  • Confirm the bank balance appearing in the accounting records is correct
  • Assist in the regular monitoring of cash flows of a business
• Methods of preparing Bank Reconciliation Statement


  • Adjusted Method
  • Book to Bank Method
  • Bank to Book Method

  
• Deposits in Transit


  Amounts already received and recorded by the company, but are not yet recorded by the bank
• Outstanding Checks


  Checks that have been written and recorded in the company's Cash account but have not yet cleared the bank account or presented to the bank by the payee
• Reconciling Items on the Book Side - Add


  • Credit Memo
  • Interest Income (Interest Earned)
  • Collection Received by the Bank or Notes Receivable Collected by the Bank
• Credit Memo


  The bank usually issue a credit memo to inform the client of any additions made to the account of the client
• Interest Income (Interest Earned)


  The amount of interest earned will increase the balance in the company's Cash account on its books
• Notes Receivable Collected by the Bank


  When notes come due, the company might ask its bank to collect the notes receivable. The bank will increase the company's checking account for the amount it collected (principal and interest) and will decrease the account by the collection fee it charges
• Reconciling Items on the Book Side - Less


  • Debit Memo
  • Bank Fees / Bank Service Charges
  • NSF Check Received
• Debit Memo


  A debit memo is issued by the bank to inform the client that the account was deducted
• Bank Service Charges


  Fees deducted from the bank statement for the bank's processing of the checking account activity
• Check Printing Charges


  The cost of the printed checks will automatically be deducted from the company's checking account
• NSF Check


  A check that was not honoured by the bank of the person or company writing the check because that account did not have a sufficient balance
• The bank holder may issue a bank check from a savings account
• Time deposit accounts are investment accounts in nature
• Deposit in transit is a reconciling item added to the unadjusted book balance
• Bank Service Charge is a reconciling item deducted from the unadjusted book balance
• Adjusting journal entries are prepared based on the reconciling items on the bank side of the bank reconciliation
• A bank reconciliation is prepared by comparing the cash balance recorded in the company's books with the corresponding amount shown on the bank statement.