What Is Bank Reconciliation?

First step to understanding what is bank reconciliation is to explore the definition of this accounting term.

Bank reconciliation – comparison of accounting records of the cash in bank with the actual cash held per bank statement and clarification of any differences. The result of the bank reconciliation is a statement showing and explaining differences between balance of cash book and bank statement.

Essentials supporting what is bank reconciliations

The following aspects are important for understanding what is bank reconciliations:

  • Cash book of the business records cash paid to the bank and cash taken from the bank by cheques.

  • Bank on its turn records these items in its own books and provides a customer with a bank statement showing summary of transactions between bank and customer

  • With the help of bank statement the business can verify correctness of cash book balance and make necessary adjustments

Differences between cash book and bank statement are classified into two types:

  • timing differences

  • informational differences.

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Timing differences

Part of the process while learning what is bank reconciliations, is to understand why there are differences between cash book and bank statement. Assume the following events occurred in ABC company:

  • 15.07 – Company ABC draws a cheque to pay to the supplier and this drawing is recorded in the cash book

  • 18.07 – cheque is mailed to the supplier

  • 20.07 – cheque is received by the supplier

  • 20.07 – the supplier provides cheque to its bank

  • 20.7 – two banks connect and the payment is included into the bank statement of ABC company.

Here you can see that there is 5 days lag between the entry into the cash book of ABC recording decrease in cash in bank and the entry of this transaction into the bank statement.

Types of Timing Differences

  • Cheques drawn by the company and not yet recorded by the bank (as above)

  • Payments to the bank, i.e. acceptance of cheques from other entities

  • Errors in the bank statement or cash book

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Informational Differences

Another which you need to understand while learning what is bank reconciliations are informational differences.

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These are items which are not supported by cheques drawn or received, but made directly through the bank account, i.e.:

  • dividends received directly to the bank account

  • payments by customer to the bank account

  • bank charges, interest

  • payment orders, i.e. orders made to the bank for certain regular payments like telecommunication services, loan installments and other.

In case these items are not recorded in the cash book, they need to be recorded based on the bank statement.