Bank Reconciliation Process

Here we will be exploring bank reconciliation process.

Bank Reconciliation Process Steps

There are certain steps which need to be followed to make a bank reconciliation, i.e.:

  • identify total difference between cash book and bank statement

  • compare cash book entries with bank statement entries and tick them, since they will not be used further in the process

  • complete cash book by recording adjustments, i.e. information found on the bank statement, but not yet recorded into the cash book. At this stage timing differences should not be included
  • prepare a bank reconciliation statement, which will show reconciliation between the cash book and bank statement after the informational differences were recorded into the cash book and support the remaining differences, which will be timing differences.

     

bank-reconciliation-process

Bank Reconciliation Sample For A Better Understanding

In order to understand bank reconciliation process let us analyze practical example.

1st step of bank reconciliation process: identify difference between cash book and bank statement. Below you are provide cash book and bank statement of a certain entity for April. Unadjusted cash book balance at the end of April is $3830. Bank statement balance as of end of April is $5778.

Non-adjusted Cash Book For April

Cash book April                
Day Company
Inflow
Day
Company
Outflow
Opening balance
3040
2
ACB
30
7
Zeta
165
3
BNC
456
7
Beta
340
15
GoodDay
1340
7
Gama
124
22
Mahony
976
7
Juditia
980
24
Levelita
192
15
Cash sales
20
26
Graham
367
15
Magnolia
34
30
Gory
45
22
Oregano
285
22
CoolStuff
1203
27
Orwel
456
30
Calipso
589
Closing balance
3830

Bank Statement For April

Bank statement April            
Day
Transaction    

   

Balance
1
   
Outflow
Inflow
3040
3
1345
30
0
3010
4
1346
456
0
2554
7
Utah PLC
0
450
3004
8
Schedules
0
1609
4613
16
Cheques
0
54
4667
16
1347
1340
0
3327
23
Cheques
0
1488
4815
23
1348
976
0
3839
24
1349
192
0
3647
27
Loan installment
130
0
3517
28
Cheques
0
456
3973
29
Dividends
0
706
4679
29
Medida
0
1200
5879
30
Interest
34
0
5845
30
Charges
67
0
5778

2nd step of bank reconciliation process: compare cash book and bank statement transactions and identify any transactions which are on the bank statement and which are not included into the cash book. These items will represent informational differenced, i.e. differences which are reasoned by those transactions directly recorded in the bank statement. When comparing cash book and bank statement, you need to take total amount for each day on the cash book and compare them to that day amounts in the bank statement. For example if we take April 7 cash book entries, we have 4 different cash inflow. On the bank statement we see one amount of $1609 on April 8, i.e. 4 cheques were cleared by the bank on April 8.

3rd step of bank reconciliation process: adjust cash book by informational differences. In the bank statement above you can see the items which are not on the cash book and they are marked in red. These transactions must be recorded in the cash book, i.e. we will have to adjust cash book by these items. The adjustments are provided below:

Adjustments To The Cash Book

Cash book adjustments
Day Transaction
Amount
Unadjusted balance
3830
7
Uta PLC
450
27
Loan payment
-130
29
Medida
1200
29
Dividends
706
30
Interest
-34
30
Charges
-67
Adjusted balance
5955

More detailed explanations on the cash book adjustments:

  • On April 7 and April 29 the company received payment from Uta PLC and Medida amounting to $450 and $1200 accordingly, we add these amounts to the cash book balance.

  • On April 27 bank decreased cash balance by $130 which is installment of the loan paid by the payment order (i.e. regular payment made by bank based on the payment order from the company). We decrease cash book balance by this amount.

  • On April 29 the company received dividends directly to the bank account amounting to $706. We increase cash book balance by this amount.

  • At the end of April on April 30 bank recorded interest due and bank charges amounting accordingly to $34 and $67. We decrease cash book balance by these amounts.

4th step of bank reconciliation process: prepare bank reconciliation indicating timing differences between adjusted cash book balance and bank statement. If we compare adjusted cash book balance of $5955 with the bank statement balance at the end of April we can see that still there is a difference. The reason for such difference is time, i.e. certain transactions were already recorded in the cash book, but not yet in the bank statement. We need to identify these differences and the will be included into the bank reconciliation.

Referring to the cash book above such items which are not on the bank statement are marked in blue. These items were recorded in the cash book as payments received or made, but cheques were not yet cleared by the bank.

On April 30 receipt of $589 from Calipso was recorded in the cash book, however the cheque supporting this receipt was cleared by the bank only in May, therefore we deduct this amount from the adjusted cash book balance to get the bank statement balance as of April.

On April 26 and April 30 cheques for payment to Graham and Gory amounting accordingly to $367 and $45 were issued, but not yet cleared by the bank. Therefore we add up those amounts to the adjusted cash book balance and finally we get the same amount which is on the bank statements of end of April, i.e. $5778.

Bank Reconciliation as of end of April
Amounts
Adjusted cash book balance
5955
Deduct cheques received and included into the bank after period end
Receipts from Calipso
-589
5366
Add cheques presented to the bank after the period end
Payment to Graham
367
Payment to Gory
45
Reconciled balance
5778

So the purpose of bank reconciliation process is to adjust cash book with those items which must be included since had an impact on the cash balance during the particular period. Afterwards to clarify and support any remaining differenced between adjusted cash book balance and bank statement balance and such differenced are usually due to difference in timing of issuing cheques and clearing those cheques by the bank.