Bank Reconciliation

Bank Reconciliation Overview

A bank reconciliation is the process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement. The goal of this process is to ascertain the differences between the two, and to book changes to the accounting records as appropriate. The information on the bank statement is the bank's record of all transactions impacting the entity's bank account during the past month.

A bank reconciliation should be completed at regular intervals for all bank accounts, to ensure that a company's cash records are correct. Otherwise, it may find that cash balances are much lower than expected, resulting in bounced checks or overdraft fees. A bank reconciliation will also detect some types of fraud after the fact; this information can be used to design better controls over the receipt and payment of cash.

If there is so little activity in a bank account that there really is no need for a periodic bank reconciliation, you should question why the account even exists. It may be better to terminate the account and roll any residual funds into a more active account. By doing so, it may be easier to invest the residual funds, as well as to monitor the status of the investment.

Bank Reconciliation Terminology

The key terms to be aware of when dealing with a bank reconciliation are:

  • Deposit in transit. Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds. If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation. A deposit in transit occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several days can cause a delay), or the entity has not yet sent the deposit to the bank at all.
  • Outstanding check. A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash. If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.
  • NSF check. A check that was not honored by the bank of the entity issuing the check, on the grounds that the entity's bank account does not contain sufficient funds. NSF is an acronym for "not sufficient funds." The entity attempting to cash an NSF check may be charged a processing fee by its bank. The entity issuing an NSF check will certainly be charged a fee by its bank.

Bank Reconciliation Procedure

The following bank reconciliation procedure assumes that you are creating the bank reconciliation in an accounting software package, which makes the reconciliation process easier:

1: Enter the bank reconciliation software module. A listing of uncleared checks and uncleared deposits will appear.

2: Check off in the bank reconciliation module all checks that are listed on the bank statement as having cleared the bank.

3: Check off in the bank reconciliation module all deposits that are listed on the bank statement as having cleared the bank.

4: Enter as expenses all bank charges appearing on the bank statement, and which have not already been recorded in the company's records.

5: Enter the ending balance on the bank statement. If the book and bank balances match, then post all changes recorded in the bank reconciliation and close the module. If the balances do not match, then continue reviewing the bank reconciliation for additional reconciling items. Look for the following items:

  • Checks recorded in the bank records at a different amount from what is recorded in the company's records.
  • Deposits recorded in the bank records at a different amount from what is recorded in the company's records.
  • Checks recorded in the bank records that are not recorded at all in the company's records.
  • Deposits recorded in the bank records that are not recorded at all in the company's records.
  • Inbound wire transfers from which a lifting fee has been extracted.
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