Bank Reconciliation

See Also:
How to manage your banking relationship.
Which Bank to Choose?
Is It Time To Find A New Bank?
5 C’s of Credit (5 C’s of Banking)

Bank Reconciliation Definition

The bank reconciliation definition is the settlement of records between the balance per company financials and the balance per the bank statement. The process of accounting bank statement reconciliation is essential because of the many timing differences and errors in the recording process between two parties. When effectively implemented it assures that the bank as well as the business have relevant financial statements.

Bank Reconciliation Meaning

Bank reconciliation means reconciling financial statements which are owned by both the business itself and the bank statement. Without bringing these 2 records together the process of bank reconciliations would not bring value. From here each account is checked with records to assure a purchase date, income or expenditure, notes or additional needs, and more. This part, specifically, is where many differences arise. The cause of these may include bank deposit and work hours, policies and procedures for both entities, and more. Due to the different record keeping methodologies an alignment must be made to assure that each party has an operable understanding of the financial state of the company.
Bank reconciliation methods and procedures are focused on attaining adjusted cash balances which can be assembled into statements for both the bank and the associated business.
To avoid fraud while performing cash reconciliation, delegate this task to an employee who has no other connection with company cash.

Download The Know Your Economics Worksheet

Bank Reconciliation Method

To begin the bank reconciliation method, enter bank and company balance on a schedule. This will create the initial foundation for the process to proceed. It is important to include the previous bank reconciliation form, if any, to establish differences between current records and this. Once completed, the process moves on to find differences in the accounts of the current period.
Next, look for deposits in transit – any deposits not yet included in the bank forms. These are deposits recorded by the company which are not yet in the bank records. Compare the bank statement deposits with the business’ internal deposit register. Add these to bank statements to form two equal records: one for the bank and one for the firm itself.
Then, find outstanding checks – any checks issues but not yet paid. These are checks written by the company which have not yet been fulfilled by the bank. Compare bank statement listings for paid checks with checks issued by the business under the cash payments journal. Deduct these from the bank records.
Now, find any errors. An example of one such error would be a returned check recorded as $50 but is actually in the amount of $60. Bank errors, when corrected, effect the adjusted balance of company records. The inverse is the case for company errors.
Finally, compile any final changes. These can include fees, interest, and other additional notes.
Complete the bank reconciliation format in this order to cover all important issues. A solid policy must be in place for bank reconciliation statements to be useful.

Bank Reconciliation Example

For example, Minnie is the CFO for Debt Collect LLC, a privately held debt collections company. Debt Collect is in good financial condition and regularly keeps up with their accounting work. Today, Minnie’s task is to review the bank reconciliation process.

Collecting Information

Minnie begins by collecting the relevant information. She sends a memo to all company accountants instructing them to make any final changes which effect overall company financial statements. After some time, she has all of her necessary records.

Performing the Reconciliation

Minnie then sets down to perform her reconciliation. She enters both bank and company balances on a schedule. She also compares this with her previous reconciliation form.
Minnie notices deposits are not at the same level. She quickly corrected this when she accounts for deposits in transit. Finally, she has reconciled the forms, and she moves on.
Minnie then accounts for outstanding checks. Upon examination, her work reveals a major problem. Her cash payments journal is much higher than that of the bank. She looks further to discover a very high level of bounced checks. Further research shows that debt holders, convinced by company contact, are sending checks. The problem is that they are not sending fulfillable checks. After looking at company policy, she prepares some procedure changes which should prevent the company from sending non-collectible checks.
Minnie completes her bank rec with no additional problems. She is satisfied by her analysis because it yielded results that will show her to be one of the great minds of the company. She looks forward to presenting her ideas to the board of directors and helping her employer.
If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.