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Bank Reconciliation

Bank Reconciliation

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Published by Hasan Imam

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Published by: Hasan Imam on Sep 05, 2009
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1
Bank Reconciliation
One of the most efficient and most commonly used tools for checking the accuracy of thebookkeeping system is a check known as the "Bank Reconciliation". This check is usuallycarried out once a month, at the end of the month.What is Bank Reconciliation?Let us assume for the purpose of this example that your name is Miles and that you are atthe end of June xx. Your accounts show that the current account at Western Union Bank hasa debit balance of $ 1,000 (as was explained, it is possible to relate to a current account as apersonal account. In other words on June 30, xx, the bank owes you $ 1,000). Logically, on June 30, xx, the Western Union Bank accounts should show that you, Miles, have a creditwith the bank of $ 1,000. If the balance in the Bank's accounts (as may be seen easily fromthe bank statement that is received each month by every business) is identical, this provesthat your bookkeeping is incredibly efficient, all communications with the bank, which isusually a main component in the activities of the business, were recorded correctly.In reality, the situation is a little different. Almost always, balance at the end of the monthcan
not
be reconciled because, in the main, as a result of data that appear in only one of the systems (our bookkeeping, the bank's accounts) but not in both of them at once. Theaim of the Bank Reconciliation is to attempt to locate the reasons for the discrepanciesbecause of which the two balances are not reconciled. It is clear that after "neutralizing" thereasons for the irregularities that are the cause of the lack of reconciliation, the balances inboth places must be identical.
An example:
For purposes of the example, let us assume that the Western Union Bank accounts are to bereconciled to June 30,xx.Details: The balance in Miles' account for the Western Union current account shows a debitbalance of $ 1,000. The bank's accounts, on the other hand, show that on June 30, xx, Mileshad a credit balance of $ 1,500. The reasons for the lack of reconciliation are as follows:
The amounts that appears on only thebank statement:
1.A credit for interest (current account) in an amount of $ 50 for June 30, xx (notrecorded in Miles' accounts).2.A debit for bank charges for the current account in an amount of $10 as of June 30,xx (not recorded in Miles' accounts).3.A credit for a bank error in an amount of $ 300 dated June 27, xx, that belongs toMiller. Miles' account was credited in error (similar name).
The amounts that appear only in Miles' accounts
1.A check for $ 160 that was paid to a supplier, that had not yet been paid in by thereconciliation date.
Preparing the Bank Reconciliation Statement
 The basic technique for finding the reason that the accounts are not reconciled is to preparea "Reconciliation Statement", As a rule, check the following two possibilities for each item:
 
21.
Does the transaction actually belong to us (Miles) - if so, if the transaction has onlybeen recorded with the bank and not in our accounts - we must record it (the bankhas already recorded it).On the other hand, it the transaction has only be as recorded in our accounts and notin the bank's accounts, a parallel record should be made on the bank section in thereconciliation statement.2.If the transaction does not belong to us - in this case the bank's records are in error,and the bank should correct its records. The Bank Reconciliation statement is in fact divided into 2 T accounts. The right side reflectsour accounts (Miles' accounts) while the left side reflects the Bank's bookkeeping recordsthat refer to us (in our case, it is reasonable to assume that in the records of the WesternUnion Bank, your account is called "Miles Account").It is important to remember that from our point of view the current account with the WesternUnion may be referred to as a real account (the bank "owes" us or "is owed" by us, as maybe the case.We will go on to a presentation of the Bank Reconciliation Statement:RECONCILIATION OF THE WESTERN UNION BANK ACCOUNT AS AT JUNE 30, xx
DetailsMilesAccounts
 
CurrentAccount withthe WesternUnion Bank
DebitCreditBanks'Accounts
"Miles"Account
DebitCredit
Balance to reconciliation date,30.6.xx1,0001,500
Amounts appearing only on theBank Statement
 30.6.xx Credit: Interest5030.6.xx Debit: Bank charges 1027.6.xx Credit: Error (belongs toMiller)300
Amounts that appear only in ouraccounts
 30.6.xx Check to supplier, Not yetpresented to bank1601050104601,500 Adjusted Balance as at 30.6.xx1,0401,040DebitNotice that at in preparing the Reconciliation Statement:
Heading:
The name of the bank for which we are preparing the reconciliation statement
 
3
and the date of the reconciliation (June 20, xx).
First Row:
A record (it is preferable to circle it or mark it in bold) of the balance thatappears in our accounts and at the bank as at June 30, xx pre-reconciliation.
Amounts that appear only on the bank statement
1.
Credit: Interest
- The bank credited the account with $ 50 interest. From our pointof view nothing has been recorded and therefore we will debit the bank with $ 50 (theBank owes us another $ 50 in respect of the interest due to us).
2.
Debit: Bank Charges
- The bank has debited us with $ 10. From our point of view,the matter has not yet been recorded. It is clear that the bank is entitled to $10 (bankcharges due to the bank).
3.
Mistaken Credit
- Deposit for Miller - The amount does not belong to us at all. Theerror is that of the bank. Therefore we will indicate in the bank section (the right sideof the reconciliation statement) the fact that bank should debit us (this is how thebank will cancel the erroneous credit that appears in Miles' accounts). In the righthand part (Miles accounts) there is no need to record anything as from the start, we(Miles) have not made any record at all concerning the $ 300.
Amounts that appear only in our accounts.
Check not yet presented
- As at the date of reconciliation, the bank does not yet knowthat $ 160 is about to be deducted from our account. Had the bank known this, it wouldhave debited us with this amount (debit, reducing our credit balance). The last row - theadjusted balance of $ 1,040. That is the real balance in our account today (and not $ 1,00 or $ 1,500 as appeared inthe pre-reconciliation balances. The adjusted - balance - $ 1,040 - must be the same in both sections of the reconciliationstatement, If the amount does not agree, it proves that we have not found the cause of the lack of agreement. Journal Entriesas a result of the ReconciliationIn our accounts (Miles' accounts) we have to make entries in the journal as a result of theamounts that appear on the right side of the Reconciliation Statement. The entries willbe as follows:
DebitCredit
1. Debit: Western Union current accountCredit: Income from Interest
Current account interest - 30.6.xx
50502. Debit: Expenses for bank chargesCredit: Western Union current account
Current Account Bank Charges - 30.6.xx
1010
 TheNominal Ledger, after the additional entries, will indeed, show a balance of $1,040 as follows:
WESTERN UNION - CURRENT ACCOUNT

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