Bank Reconciliation
A Bank reconciliation statement is prepared to ensure that bank transactions have been properly accounted for and any difference between bank and business records has been adequately addressed.
The bank reconciliation statement has three major portions,
i) the Balance as per the bank book,
ii) the differences, with the reasons and
iii) account balance as per the Bank statement.
PROCEDURES FOR PREPARING BANK RECONCILIATION
Bank reconciliation statements are a powerful accounting controlling tool as it helps management ensure that proper bank books are being maintained by the business. The frequency of preparing a bank reconciliation statement depends upon the business practices and arrangement with its bank for the frequency with which it receives the Bank statement. However, every business must prepare a bank reconciliation at the end of each accounting period.
Most modern computerized accounting systems automatically prepare bank reconciliation statements, by uploading the bank statement into the system in a predefined format.
Besides the fact that this statement can be automatically prepared by accounting systems, it is very important that you understand how these statements are prepared.
Following are the steps involved in the preparation of a Bank reconciliation statement;
Compare all the transactions of the Bank column of the cash book with the bank statement and mark any differences. These differences are then presented in a manner that the balance of any record (Bank statement/ bank book) can be reached, starting from the other record.
Approaches to Bank Reconciliation Statement
There are two approaches to preparing a bank reconciliation statement.
STARTING FROM THE BANK STATEMENT
Either we can start from the Balance as per the Bank Statement and then make adjustments for the transactions which are recorded into the Bank Statement but are not updated into the Bank Book (Ledger) Then we will have the Expected balance as per the Bank Book (Ledger) and after that, we make adjustments for the transactions which have been recorded into the Bank book (Ledger) but are not yet updated into the Bank Statement.
STARTING FROM THE BANK BOOK
The other approach is to start the Statement with the Balance as per the Bank Book and then present adjustments for the transactions which have been updated in the Bank Book (Ledgers) but not yet recorded into the records of the Bank.
Remember, however in the real world upon receiving the Bank Statement, the company before preparing reconciliation updates its ledgers with transactions that have been reflected in the Bank Statement and the updated balance of the Bank Book (ledger) is reflected in the Balance sheet.
PREPARATION OF THE BANK RECONCILIATION STATEMENT
1. Start the statement of any one record i.e. Balance as per Bank Book OR Bank statement
2. Add the amount back which has been subtracted from that record but is not present in the other. For Example, if you started with the Balance as per the Bank statement then add back any Debits which are not present in the Bank book. Examples of such transactions could be Bank Charges or markup on the Bank overdraft facility etc. On the other hand, if you started with the Balance as per Bank Book (Ledger) the cheques issued to the suppliers but not yet presented by them in the bank will be added back to the Balance as per the Bank Book.
3. Subtract the amount which has been added to the record but is not available into the second record. For example, if you started the reconciliation by the Balance as per the Bank statement then subtract entries like direct transfers by customers into your account or profit paid by the bank on the saving account etc. Similarly, if the reconciliation was started from the balance as per Bank Book (Ledger), then Subtract entries that had been added (debited) into the Bank Book but are not yet updated in the bank records e.g. cheques received by the customers not yet cashed from the bank.
After making these adjustments we have the expected balance of the other record (Expected balance as per Bank Book (Ledger) in case we started with the Balance as per the Bank Statement OR Expected Balance as per the Bank Statement if we started with the Balance as per the Bank Book).
Now we will make adjustments for the entries which have not been yet updated in the record we started reconciliation.
4. Add back the amounts which have been subtracted from the 2nd record but not updated in the 1st record. If we started our reconciliation from Balance as per the Bank statement then examples of such entries will be Cheques issued to but not yet presented by the suppliers. In the same way, if we started our workings with the Balance as per the Bank Book (Ledger) then an example of such additions would be any transfers from the bank account which yet not been updated in the Bank book e.g. Bank charges etc.
5. Subtract the amounts which have not yet been subtracted from our 1st records. If we choose the Bank statement as our 1st record and start our reconciliation by Balance as per the Bank statement then examples of such entries will be Cheques received from customers not yet cashed by the bank. However, if we started our statement from the Balance as per the Bank Book (Ledger) then subtract any profit on savings credited by the bank and not yet updated into the business’s books of accounts.
FEATURE OF BANK RECONCILIATION
a. While in a Bank reconciliation statement, differences between two records i.e. Bank book and Bank statement Balance are presented in the form of adjustments, however, these adjustments are not part of any double entry until not recorded in the Book of Accounts.
b. It is simply a statement and not an account- Bank reconciliation statement is prepared to identify the reasons why the balance in the books of accounts and Balance sheet is not in agreement with the Balance as shown in the Bank Statement.
c. It helps to plan the short-term future cash flows by representing how many cheques have been issued to the vendors/ supplier which may result in cash outflow in the future and further how many cheques are received by the customer which will result in cash inflow in the future.
d. This is a periodic statement thus representing the position at a specific date and the frequency for its preparation may vary from business to business.
e. This statement is valid only for the day for which it is prepared. The particulars of this statement may change the very next day. This is the reason that the date for which this reconciliation is being prepared shall be clearly mentioned at the top of the statement.
