Bank Reconciliation Statement

Do you want to know how much cash you really have in your bank account? Do you want to avoid any errors, fraud, or penalties that may affect your financial reporting and tax compliance? If yes, then you need to learn how to prepare a bank reconciliation statement.

A bank reconciliation statement is a document that compares your cash balance as per your accounting records with the cash balance as per your bank statement. It helps you identify and explain any differences between the two balances, such as deposits, checks, fees, interest, or errors. By reconciling your bank accounts, you can ensure that your cash records are accurate and complete and that you have enough funds to meet your obligations.

What Is the Purpose of a Bank Reconciliation Statement?

Imagine you are running a small business, and you want to know how much money you have in your bank account. You check your accounting records and see that you have ₹45,000. You are happy and confident that you can pay your bills and suppliers. But wait, is that the true amount of cash you have? What if there are some transactions that you have missed or recorded incorrectly? What if there are some fees or charges that the bank has deducted from your account? What if there are some deposits or checks that have not yet cleared the bank? How can you be sure that your cash balance is accurate and complete?

This is where a bank reconciliation statement comes in handy. A bank reconciliation statement is a document that compares your cash balance as per your accounting records with your cash balance as per your bank statement. It helps you identify and explain any differences between the two balances, such as deposits, checks, fees, interest, or errors. By reconciling your bank accounts, you can ensure that your cash records are accurate and complete, and that you have enough funds to meet your obligations.

How Do You Reconcile a Bank Statement?

Bank reconciliation is the process of verifying the accuracy and completeness of your accounting records and bank transactions. It involves comparing your cash book and bank statement balances, identifying and explaining any differences, and making the necessary adjustments to your records. Bank reconciliation helps you monitor your cash flow, detect errors, prevent fraud, and comply with accounting standards.

Here is a step-by-step guide on how to write a bank reconciliation:

Obtain the Bank Statement and the Cash Book for the Same Period

You can access your bank statement online or request a paper copy from your bank. Your cash book is a record of all your cash transactions, such as deposits, withdrawals, checks, fees, and interest. Make sure that both documents cover the same period, such as a month or a quarter.

Compare the Deposits and Withdrawals in Both Documents

Start with the deposits and check if the amounts and dates in your cash book match those in your bank statement. If they do, mark them as cleared or reconciled. Do the same for the withdrawals, such as checks, cash payments, and bank charges. Note that some transactions may not appear in both documents due to timing differences or errors. These are called reconciling items and will be addressed in the next steps.

Identify and List the Deposits in Transit 

Deposits that you have made and recorded in your cash book but that the bank has not yet processed are known as deposits in transit. For example, if you deposit a check on the last day of the month, it may not show up on your bank statement until the next month. To find the deposits in transit, look for the deposits in your cash book that are not marked as cleared. Add them to a list and calculate the total amount.

Identify and List the Outstanding Checks 

Outstanding checks are those that you have written out and entered into your cash book, but the recipients have not yet cashed them or the bank has not yet cleared them. For example, if you write a check to a vendor on the last day of the month, it may not appear on your bank statement until the next month. To find the outstanding checks, look for the checks in your cash book that are not marked as cleared. Add them to a list and calculate the total amount.

Identify and List the Bank Errors

Bank errors are defined as any mistakes made by the bank that have an effect on the amount in your account. Examples of these mistakes include charging the wrong amount, creating duplicate or missing transactions, and depositing or withdrawing the wrong amount. To find the bank errors, look for the transactions in your bank statement that do not match your cash book records. Add them to a list and indicate whether they are positive or negative adjustments. For example, if the bank deposits $100 less than what you actually deposit, it is a negative adjustment of $100. If the bank charges you $10 more than the actual fee, it is also a negative adjustment of $10.

Identify and List the Cash Book Errors

When you or your employees make mistakes that impact your cash book balance, such as entering the incorrect amount, deleting or duplicating a transaction, or using the incorrect account, it is known as a cash book error. To find the cash book errors, look for the transactions in your cash book that do not match your bank statement. Add them to a list and indicate whether they are positive or negative adjustments. For example, if you recorded a deposit of $200 instead of $300, it is a negative adjustment of $100. If you recorded a check of $50 instead of $40, it is also a negative adjustment of $10.

Prepare the Bank Reconciliation Statement

A bank reconciliation statement is a document that shows how the bank balance and the cash book balance are brought into agreement by adding or subtracting the reconciling items. You can use the following format to prepare the bank reconciliation statement:

Bank Reconciliation Statement as of (date)

Bank balance as per bank statement

Add: Deposits in transit

Less: Outstanding checks

Add/Subtract: Bank errors

Adjusted bank balance

Cash book balance as per cash book

Add/Subtract: Cash book errors

Adjusted cash book balance

Verify that the Adjusted Balances are Equal 

The final step is to check that the adjusted bank balance and the adjusted cash book balance are the same. If they are, it means that you have successfully reconciled your bank statement and your cash book. If they are not, it means that there is still a discrepancy that needs to be resolved. You may need to review the previous steps and find the source of the error.

How Often Should You Reconcile Your Bank Account?

Bank reconciliation is a process of checking the accuracy and completeness of your accounting records and bank transactions. It involves matching your cash book and bank statement balances, finding and explaining any differences, and making the necessary adjustments to your records. Bank reconciliation helps you monitor your cash flow, correct errors, prevent fraud, and follow accounting standards.

The frequency of reconciling your bank account can depend on your personal preferences, business needs, and the number of transactions. However, a general suggestion is to reconcile your bank account at least once a month. This way, you can ensure the consistency and correctness of your accounting records and bank transactions, as well as find any discrepancies or errors.

Reconciling your bank account monthly can help you to:

• Track your cash flow and avoid overdraft fees or bounced checks.
• Find any fraudulent or unauthorised transactions and report them to the bank quickly.
• Fix any mistakes made by the bank or yourself in recording the transactions.
• Follow the accounting standards and tax regulations.

To reconcile your bank account monthly, you need to:

• Get the bank statement and the cash book for the same period, usually at the end of the month.
• Compare the deposits and withdrawals in both documents and mark the matching items.
• Find and list the reconciling items, such as deposits in transit, outstanding checks, bank errors, and cash book errors.
• Prepare the bank reconciliation statement using the following format:

Bank Reconciliation Statement as of (date)

Bank balance as per bank statement

Add: Deposits in transit

Less: Outstanding checks

Add/Subtract: Bank errors

Adjusted bank balance

Cash book balance as per cash book

Add/Subtract: Cash book errors

Adjusted cash book balance

• Check that the adjusted balances are equal. If not, review the previous steps and find the source of the difference.
• Record the adjustments in your cash book and update your cash account balance.

If your business has a lot of transactions or operates in different currencies, you may want to reconcile your bank account more often, such as weekly or daily. This can help you to:

• Manage your cash flow better and optimise your working capital.
• Avoid any delays or errors in processing the transactions and payments.
• Reduce the risk of fraud and theft and improve your internal control.
• Improve your financial reporting and decision making.

To reconcile your bank account more often, you need to:

• Access your bank statement and your cash book online or through a software tool.
• Compare the transactions in both documents and mark the matching items.
• Find and list the reconciling items, such as currency fluctuations, bank fees, and interest.
• Prepare the bank reconciliation statement using the same format as above or a customised one.
• Check that the adjusted balances are equal. If not, review the previous steps and find the source of the difference.
• Record the adjustments in your cash book and update your cash account balance.