Do you check your bank statements against your own records? If not, you should. Here’s what you need to know about bank reconciliation statements.
Accurate, up-to-date information is the lifeblood of any business.
Most businesses receive a regular bank statement, detailing all of the transactions passing through the business’s current account in a particular period. Some businesses, however, neglect to act on the valuable information contained in the statement. They don’t check this information against their own records and identify and reconcile any differences between the two. Failing to do this could prove very costly. For instance, the amount of available cash could be overestimated, and could expose the business to risk (the reason for discrepancy could be due to ongoing employee fraud, for example).
A manual bank reconciliation statement can be created relatively simply. Many businesses use a financial software package with a bank reconciliation facility but you can also do this manually. Doing bank reconciliations regularly will considerably improve your understanding and control of the business and its current performance, and help avoid nasty surprises.
Before looking at the individual steps to be followed, it is worth considering the broad logic of what you are trying to achieve. The monthly bank statement is an account of the transactions involving your current account with a bank in a particular month. It records the various lodgements and withdrawals (cash, cheque or electronic) to and from the bank account.
The statement also records the bank’s fees for various services provided. Fees are often charged on a quarterly, rather than monthly, basis. When a bank lodgement or withdrawal is made, or a cheque is written, it is also recorded in the business’s financial records.
Sometimes there can be differences between bank and business records. For example, a bank statement may fail to record a lodgement made on the day the statement was issued, or may not take account of a cheque which has been issued to a supplier but which has not yet been presented for payment to the bank.
Preparing a bank reconciliation statement is a key business process designed to identify the differences between the bank’s and business’s records, to reconcile these, and to identify the correcting entries, if any, that need to be made either by the bank or the business in their respective records. It provides a more up-to-date record of the business’s true cash position.
There are four key steps in the process
Adjusting the balance per bank statement
The first step is to adjust the statement on the bank balance so that it reflects the true or correct bank balance. The key items to be adjusted here are:
- Balance per bank statement – no change.
- To the balance per bank statement, add deposits in the course of transit. These are deposits made by the business, recorded in its books, but not yet reflected in the bank statement. The lodgement, for example, may have been made the on same day as the statement was issued.
- Deduct cheques issued, but not yet paid by the bank. When issued, the business will have recorded the debt as paid in its books, but the cash balance in the bank account will be higher than it should be, if the cheque has not been presented for payment.
- Add or deduct any bank errors. Occasionally, for instance, the amount of a transaction may be recorded incorrectly. For example, a cheque for €718.29 may be recorded as a cheque for €178.29. Note that, as the mistake is in the bank’s records, the bank will have to post amending entries to its records, which will appear in the next bank statement issued.
- The resultant figure is the true or correct bank balance.
Adjusting the balance per the cash account (or ‘book’)
The second step is to adjust the business’s cash account, so that it reflects the true or correct balance. The key items to be adjusted here are:
- Balance per business books – no change.
- Deduct bank service charges and fees. These are the bank service charges and fees for cheque books that are detailed in the bank statement, but which will not yet be recorded in the business accounts.
- Deduct unpaid cheques and associated charges. These are the cheques lodged by the business to its bank account, but which have not yet been paid or ‘bounced’ by the customer’s bank. The bank will not record this as a lodgement to your account in its books, and the business will have to post amending journal entries to correct its books (more about this later).
- Deduct direct debit / standing order payments. If these automated payments from your account are not already recorded in your cash book, they should now be allowed for.
- Add cash lodged directly to the bank. This includes cash lodged by a customer directly to the bank account that you have not yet reflected in your own records.
- Add interest earned. Most businesses will not know the amount, if any, of interest earned on credit balances in their bank accounts until they are advised of this in a bank statement. The amount of interest earned will have to be recorded in the business’s records.
- Add or deduct errors made. For example, a business may have overstated in its books the value of a bank lodgement made, so will need to take account of this by passing an amending journal entry.
- The resultant figure is the true balance per book.
Compare the balances and eliminate differences
The balance per bank statement and the balance per book should now be identical. If there is still a difference between the balances, then the bank statement and the business records should be re-examined carefully to identify the source of the difference(s). This exercise should be repeated, as necessary, until all differences between the two sets of records are eliminated.
Post amending entries to business journals
The final stage of the reconciliation process is to post amending entries to the business records, where required. You should only be concerned with correcting items in the business’s book. If the error arises on the bank side, it will be for the bank to correct in its records.
For example, we saw above that a customer cheque was returned unpaid, which had the effect of making the bank account balance lower than recorded in the business’s records. Accordingly, the business should deduct the amount of the cheque by posting a debit entry to ‘accounts receivable’ and crediting ‘cash’ by the same amount.
Any charges for the unpaid cheque could be debited to ‘miscellaneous expenses’, with ‘cash’ credited by the same amount. The customer account in the debtors’ ledger should also be amended to reflect that these monies are still owing. The bank need not correct its records, as it correctly identified the unpaid cheque in its statement of account.
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