Before exploring how to do bank reconciliation, you should remember two basic concepts which will be used in this process:
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One is bank statement – list of all transactions which occurred during a particular period of time and impacted cash in bank account of business. Such statement is prepared by bank and is provided to the company owning account in the bank.
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The other is cash book – it is accounting book of prime entry listing all the transactions which impacted cash in bank and this book is prepared by the accountant
It is required that entries on the bank statement are exactly the same as entries in the cash book, since cash book is a reflection of bank statement. Also the final balance in the bank statement should be equal to the final balance in the cash book.
If we take cash book, in it we can see how much cash business has at the end of particular period.
However actually it might happen, that balance of cash book is not the same as the balance in the bank statement. The question how to do bank reconciliation covers process how to explain and eliminate such difference.
The main reasons for such difference:
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Errors: there might be different types of errors, i.e. error in calculation the total balance, error in recording transaction which had impact on cash.
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In cash book non recorded charges and interest accrued by the bank. Such expenses are recorded into the bank statement directly by the bank, therefore they are not immediately reflected in the cash book.
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Difference in timing of transactions and charges: certain cheques received or paid, but not yet cleared, i.e. recorded in the cash book, but not yet reflected in the bank statement
Process how to do bank reconciliation covers a comparison of bank statement done regularly with the cash book in order to determine any differences and clarify them, i.e. find possible errors and correct them, record non-recorded bank charges and determine any differences due to timing difference.
Information on the bank statement
In order to do bank reconciliation properly, you need to understand what information can be seen on the bank statement. Usually bank statements are issued on a monthly basis and indicate the following:
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Balance on the bank account at the beginning of month
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Debits (or inflows) during the month
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Credits (or payments) during the month
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Balance on the bank account at the end of month
Remember that cash balance on the cash book will be on the debit side, as it is the asset owned by the business. However on the bank statement it will be shown as credit balance, indicating the bank owes this amount to the business.
The process how to do bank reconciliation
- Identify the difference between cash book and bank statement
- Cross reference all bank statement entries to the entries in the cash book
Practical example:
Condition:
March 31, 2009. Company ABC has a balance in the cash book equal to $706.56. In the bank statement there is a balance equal to $987.45
Checking cash book and bank statement it was determined that:
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$50 of cash receipt during March was not recorded in the cash book
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Amount paid by cheques and recorded into the cash book, but not yet recorded into the bank statement amount to $145.90
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Cheques submitted for payment and recorded in the cash book, but not yet presented to the bank amount to $376.79
The task is to do bank reconciliation
1. first step is to make corrections to the cash book
Cash Book |
|
| Opening balance | $706.56 |
| Correction of error | +$50 |
| Closing balance | $756.56 |
2. second step is to make adjustments to the bank statements
Bank Statement |
|
| Opening balance | $987.45 |
| Check received but not included into the bank statement | +$145.90 |
| Cheques paid but not yet submitted to the bank | -$376.79 |
| Closing balance | $756.56 |
After finalizing the process how to do bank reconciliation we have the same final balance in Cash book and Bank statement.