Bank ReconciliationDefinition, Process, and Procedure!

Written By:
Adiste Mae

What is a Bank Reconciliation?

In order for companies to match the cash balance in their accounting records against the cash balance in the bank statement, accountants must conduct a regular bank reconciliation (usually at the end of each month).

The practice of bank reconciliation is to make sure that the balances in the books are correct so that overdrafts, bounced checks or fraud can be avoided.

Wherever differences are determined, the necessary adjustments are made to bring the book and bank amounts to balance.

How often a company conducts bank reconciliations will depend on the number of transactions that a company has.

If the company processes a lot of payments and receipts in a day, it is advisable to do a bank reconciliation daily, or at least once per week with a final reconciliation at the end of the month.

But for the majority of businesses, the normal practice is to conduct a bank reconciliation at the end of each month.

However, there are some businesses that deal with only a few transactions in a month that they tend to reconcile every quarter or even yearly at the close of the accounting period.

When doing a bank reconciliation, the bank’s beginning balance, all the transactions for the month, and the ending balance are used.

Conducting a regular bank reconciliation allows the company to improve their internal processes, particularly the cash handling process.

Where stricter controls need to be put in place, this can be backed by a bank reconciliation.

Bank Reconciliation Process Flow

In Bank Reconciliations, there are two ending balances that need to have the same ending amount: the adjusted bank balance and the adjusted cash balance.

To arrive at the adjusted ending balance, the process starts with taking the ending bank balance and adding any deposits in transit, less checks issued but are still uncleared, and any other items that need to be added or subtracted.

To compute the company’s adjusted ending cash balance, start with the ending cash balance as per the books, subtract bank service fees, insufficient fund checks and penalties, and then add any interests earned by the bank.

Once the adjusted bank balance and adjusted cash balance are computed, their balances should be the same.

If not, there may be some transactions in the bank that have not been posted in the books.

Bank Reconciliation Terminology

There are accounts or keywords used when conducting bank reconciliations and it is important that it is understood by the person doing the reconciliation in order to determine whether it has to be added or subtracted to arrive at the adjusted ending balances.

Here are the more common terms to understand when processing bank reconciliations:

Deposits in Transit

When customers of the company pay their invoices by check or make an electronic transfer which the bank has not cleared yet, it becomes a reconciling item in the bank reconciliation.

This normally happens when these payments happen at the end of the month and the company has already posted the receipt in their books but the bank has not cleared it yet.

Deposits in transit are added to the bank balance to reflect the increase in the bank’s balance upon clearing and the posting that has already happened in the books.

Not Sufficient Funds (NSF) Check

If the company issues a check to any of its vendors without checking their bank balance, especially if they only have enough cash for operating expenses, there is a possibility that their check could bounce when it is presented by the payee.

When an NSF check is presented, it will not be honored by the bank of the payor and the payor will be charged penalty fees, the payee who presented the check may also be charged with bank processing fees.

Outstanding Check

If the company doing the bank reconciliation issues a check for which the payee has not yet presented to the bank for payment, it remains in the books of the company as a reduction of its cash balance.

However, when the bank statement is generated at the end of the month, it will not show the uncleared check.

Hence, in the bank reconciliation, outstanding checks are considered as reconciling items.

Bank Reconciliation Procedure

Bank Reconciliation is a process today that is simplified by accounting software.

Assuming that the bank reconciliation is to be done through a software, the process can start by clicking on bank reconciliation and a complete list of uncleared receipts and payments will be shown in the books.

It will ask you to enter the beginning and ending balance of the bank statement as well as the period to be reconciled.

Match each entry cleared in the bank to the books.

Once all payments and receipts have been checked against the bank, the bank charges and fees can be entered in the books.

Interest income earned, if any, should also be entered.

Once the bank ending balance is entered and it matches with the book, the bank reconciliation can be completed.

Any checks outstanding or uncleared will automatically be posted as a reconciling item.

However, should the balances not match, entries posted has to be rechecked either because the accountant made a sliding error or transposition error, or there could be checks cleared that were not at all entered in the books.

Problems with Bank Reconciliations

Even with sophisticated accounting software, there are still cases where problems arise during bank reconciliation.

This can be due to checks already voided but were presented and cleared, stale checks that need to be reissued with a current date, or when the check previously deposited was returned.

Checks that remain to be outstanding for a long time will be shown as an ongoing reconciling item for the period that they are not presented.

As such, they reduce the adjusted bank balance and restrict the cash in a way.

If the check goes on to be outstanding for over six months, the check may no longer be accepted by the bank when presented so the payee will have to be reissued with a new check.

There are also cases when a check payment by the client has not been accepted by the bank due to an error in the date, payee name or amount.

The payment may already be entered in the books and in order to correct this entry, the original one can simply be reversed.

Example of a Bank Reconciliation

Company ABC is conducting their month end bank reconciliation and has shown the following data:

Bank Reconciliation Statement

Based on the above reconciliation, the Bank Reconciliation Statement can be presented as follows:

It is a common practice for companies to keep the bank reconciliation statements in a binder along with the journal entries so that auditors will be able to easily access and verify the information during year close audits.