What Is Bank Reconciliation?
What Is Bank Reconciliation?
What Is Bank Reconciliation?
When banks send companies a bank statement that contains the company’s beginning cash
balance, transactions during the period, and ending cash balance, almost always the bank’s
ending cash balance and the company’s ending cash balance are not the same. Some reasons for
the difference are:
Deposits in transit: Cash and checks that have been received and recorded by
the company but have not yet been recorded on the bank statement.
Outstanding checks: Checks that have been issued by the company to creditors
but the payments have not yet been processed.
Bank service fees: Banks deduct charges for services they provide to
customers but these amounts are usually relatively small.
Interest income: Banks pay interest on some bank accounts.
Not sufficient funds (NSF) checks: When a customer deposits a check into an
account but the account of the issuer of the check has an insufficient amount
to pay the check, the bank deducts from the customer’s account the check that
was previously credited. The check is then returned to the depositor as an NSF
check.
Nowadays, many companies use specialized accounting software in bank reconciliation to reduce
the amount of work and adjustments required and to enable real-time updates.
1. On the bank statement, compare the company’s list of issued checks and
deposits to the checks shown on the statement to identify uncleared checks
and deposits in transit.
2. Using the cash balance shown on the bank statement, add back any deposits in
transit.
3. Deduct any outstanding checks.
4. This will provide the adjusted bank cash balance.
5. Next, use the company’s ending cash balance, add any interest earned and
notes receivable amount.
6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at
the adjusted company cash balance.
7. After reconciliation, the adjusted bank balance should match with the
company’s ending adjusted cash balance.
Example
XYZ Company is closing its books and must prepare a bank reconciliation for the following
items:
After recording the journal entries for the company’s book adjustments, a bank reconciliation
statement should be produced to reflect all the changes to cash balances for each month. This
statement is used by auditors to perform the company’s year-end auditing.
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Below is a video explanation of the bank reconciliation concept and procedure, as well as an
example to help you have a better grasp of the calculation of cash balance.
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