Bank Reconciliation

Introduction:

In term of accounting, some useful procedures are necessary in order to maintain

order into the financial health of the company. One of these usual procedures consists in
checking information from bank statement and company’s recording. It’s called “bank
reconciliation”. The main reason behind this action is to avoid financial issues due to
different kind of problem as from the bookkeeper himself or rarely from the bank. Bank
reconciliation allows company to escape financial fraud that could ruin company’s action
plan. In the other hand, the effective bank reconciliation help bookkeeper to find balances in
current accounts. In a word, the realization of regular bank reconciliation has such an
importance during a financial year.

Definition

Bank reconciliation is a term used in the accounting field to designate the comparison
of bank statement with company’s personal accounting record for a period, in order to check
eventual wrongness. It allows bookkeeper to make some corrections to the account recording
in case of possibly mistakes. Reconciliation can also be executed for others account than
bank account as credit cards or electronic wallet.

Why does bookkeeper need to make a Bank Reconciliation?

There are five main reasons why it is essential to make a Bank Reconciliation.

To track cashflow

Managing cashflow is an important aspect of running a business. Realizing a bank

reconciliation allows company’s board member to notice the link between the moment cash
move in business and in bank account. It enables to plan the amount of money that should
circulate.

To evaluate state of business

 Sight on accounting record informs with accuracy about the reality of business. If
synchronization between bank statement and accounting record is missing, it leadS to
eventual preventable errors as investing while there is less cash. Bank reconciliation assist
bookkeeper to catch bank service fees or interest income, ensuring that the account balance is
correct.

To report fraud

Bank reconciliation is not a prevention from fraud, but it is useful to detect if it exists.
Different alterations undetected immediately is picking up when bank statement is reconciled.
Also, it could adjust financial misunderstanding between business partners.

To point out bank errors

Bank errors are uncommon, but obviously bank may occasionally make a mistake. In
case of misapprehension, bank reconciliation is an useful document to justify company’s
position.

To stay update to evaluation of accounts

Shifted payment time is a real source of conflict between company and client. Bank
reconciliations act as a safety net to ensure that accounts receivable never spiral out of
control.

Procedures:

Check the two cash balances

Examination of the two statements is obligatory, as the bank statement and the
accounting record. The first step is to check if the ending balance is similar over a given
period. It’s rare to see an exact sameness between the two financial statements. The main
reason is that bank may levy fees for transactions. Alternatively, cash transfers may be
delayed.
Two key terms to understand are:
 Withdrawal: This is an unpaid check or money transfer that recorded on company’s
book.
 Receipt: This is money that company has received and recorded but not the bank.
These threats remain harmless as long as it is keeping tracked.

Recording bank reconciliation

Once issues between the two statements are determined, it is a must to document
them. Two methods can be used to this.

Making changes to journal entries

The method of journal entries consists in recording all transactions. General ledger contains a
record of all the journal entries. It is essential to notice discrepancy between the two
statements.

Bank reconciliation statement

It is a document that contains a similar information as an adjusting journal entry, but is kept
separately. The used method is determined by personal preferences and needs.

Example of Bank Reconciliation Statement