Bank Reconciliation: Step By Step Guide with Example

ABCAdda | Updated Jun 30, 2022

Bank reconciliation. Even the name sounds boring. They may not be fun, but doing them regularly will protect you from pitfalls, such as exaggerating money and falling victim to scams.

There is also some zen in the bank vote. In the end, it’s about finding balance.

So assume a full lotus position or find a comfortable chair. We’ll look at what a bank statement reconciliation is, how it works when you need to do it, and the best way to perform the task.

Here you can see an example of bank reconciliation.

What is a bank reconciliation statement?

A bank reconciliation is a report that summarizes banking and business activities that reconciles a company’s bank accounts with its financial bank records. The statement describes deposits, withdrawals, and other activities involving a bank account for a certain period. Bank reconciliation statements are a useful financial statement control tool to prevent fraud.

How do you reconcile bank statements?

The balances of the bank’s reported accounts receivable are compared with the general ledger to reconcile bank statements.

Businesses keep ledgers to record bank transactions and cash transactions. The cash column in the cash book shows cash, while the bank column shows money in the bank.

The bank also keeps a different account for each customer. In bank books, deposits are recorded on the credit side and withdrawals on the debit side. Banks send account statements to their customers every month or periodically.

A bank reconciliation is a report that summarizes banking and business activities that reconciles a company’s bank accounts with its financial bank records.

Sometimes these balances don’t match. The company must identify the causes of deviations and compensate for the discrepancies. This is done to confirm that each item is reported and that the ending balances match.

For this purpose, a consent statement is made, called account information.

Why make a reconciliation statement?

When specifying a bank statement example for reconciliation, you may wonder why the bank transactions recorded on the books do not match the bank statements? There are many reasons, and some of the most common are listed below:

  • Checks are written but not paid at the bank
  • Difference between check deposit and credit date
  • The date the check was made for payment and the billing date is different
  • Checks issued or received will not be submitted to the clearing bank
  • Bank interest earned, fees, etc., are not shown. The reason is that it is not known until you reconcile.
  • Banks can also make mistakes in debiting or crediting transactions
  • Like banks, you can also make mistakes by entering bank transactions in ledgers, etc.

For the reasons listed above, the final bank balance on your books and the actual bank balance reported by the bank do not match. This means that the bank balance you think you have in your bank is not available at the bank. Finding the balance of the book will put you in an awkward position.

To avoid this situation, a bank reconciliation report is created. This statement only compares bank transactions on the company’s books with bank statements so that you always have an accurate bank balance that is reflected on the company’s books.

How to prepare a bank reconciliation statement?

Bank Reconciliation Statement (BRS) involves identifying individual transactions and reconciling them to bank statements so that the final bank balance on the books matches the bank statement. Appropriate corrections or adjustments are made in the book to accommodate one that does not fit.

When do companies make bank statements?

Depending on the volume and value of bank transactions, reconciliation activities are carried out every day, every week, every two weeks, etc. If the transaction volume or value is higher, daily reconciliation activities are carried out to reduce the risk of payment/check reversal.

Bank reconciliation: A step-by-step guide

You will usually receive an account statement from the bank at the end of the month. To prepare bank reconciliation statements, describe cash and other deposits deposited into a company’s checking account. Billing also includes bank fees such as B. Account Maintenance Fee. Once accepted, follow these steps to approve the bank statement:

Compare deposit:

  1. Compare deposits in commercial registers with those on bank statements.
  2. Compare the amount of each deposit recorded on the debit side of the cash book bank column with the credit side of the checking account and the credit side of the bank column with the debit side of the checking account.
  3. Highlight the items that appear in both entries.

Accurate account statement: Adjust the balance on the bank statement example to match the adjusted balance. You will need to increase your deposit, subtract outstanding checks, and increase/decrease bank errors during deposits in transit.

A transit deposit is the amount received and accounted for by the company but not yet calculated by the bank. They must be attached to the bank statement.

Pending checks are checks that have been written and deposited into a company’s cash account but have not yet been cleared to a bank account. They must be deducted from the balance sheet of the bank. This often happens when checks are written on the last few days of the month.

A bank error is an error made by the bank when making an account statement. A common mistake is to enter the wrong amount or omit the amount on the bank statement. Compare the cash flow account ledger with the bank statement to find the error.

Customize account cash: In the next step, the cash balance in the business account is adjusted.

Adjust the cash flow in your business account by adding interest income or subtracting monthly fees and overdraft fees. Businesses need to factor in bank fees, NSF checks, and accounting record errors.

  • Bank fees are service charge fees and fees deducted by the bank for processing activities on the company’s checking account. This may include a monthly fee or overage charge on your bill. They should be deducted from your cash flow account. If you have earned interest income on your bank account balance, it should be credited to your cash account.
  • The bank has not paid NSF (Insufficient Funds) checks due to insufficient funds in the company’s bank account. This means that the check amount is not held in your bank account and, therefore, must be deducted from your cash account transactions.
  • Errors in cash management result in incorrect amounts being entered or amounts being omitted from the records. Correcting the error will increase or decrease the cash account in the general ledger.

Compare balances: The adjusted amounts should be the same after adjusting the bank and general ledger balances. If they are not the same, you will have to repeat the comparison. After the balances are settled, the business must make journal entries for the book balance adjustments.

How often do you need to reconcile your bank account?

Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of each month, weekly, and even at the end of each day by businesses with a large number of transactions.

Before the reconciliation process, the company should ensure that they have recorded all transactions up to the end of your statement. Businesses using online banking services can download bank statements for regular reconciliation processes instead of entering information manually.

What is the purpose of a bank reconciliation?

The bank reconciliation process offers several benefits, including:

  • Detection of errors such as double payments, payment defaults, calculation errors, etc.
  • Track and add bank charges and penalties to books
  • Detect fraudulent and theft transactions
  • Monitoring company payables and notes receivables

Bank reconciliation through accounting records software is easier and error-free. Bank transactions are imported automatically, allowing you to compare and categorize a large number of transactions at the touch of a button. This makes the bank reconciliation process efficient and controllable.

Benefits of BRS preparation

Accounting records errors can cause more than awkward circumstances when a check bounces or a business receives an annoying phone call from a creditor or payment provider that has cleared.

Bank clearing helps you detect fraud and reduces the risk of transactions that could result in fines and late fees. BRS offers several business benefits, including:

  • Error Detection: A bank reconciliation helps you identify accounting errors in every business. These include errors such as additions and subtractions, missed payments, and double payments.
  • Track Interest and Fees: Banks may add interest earned, fees, or penalty payments to your account. Monthly bank reconciliation allows you to increase or decrease that amount on your books.
  • Fraud detection: You may not be able to prevent employees from stealing your money once, but you can prevent it in the future. Bank statements help you identify and uncover fraudulent transactions. It is advisable to hire an independent person to do the reconciliation to prevent the falsification of your books and reconciliation by accountants.
  • Debt Tracking: BRS allows you to review all of your receipts, which helps you avoid embarrassment and identifies entries for receipts you haven’t submitted.

Tips for a successful bank reconciliation

Reconciling your bank account is a relatively quick and easy process, depending on the number of monthly transactions you make. It is an important piece of the personal-finance puzzle to ensure accuracy and help you achieve your financial statement goals. Here are some other tips to keep in mind when planning to reconcile your bank account:

  • Consider accounting software. Using accounting software can perform the simple task of recording transactions. Many popular accounting software programs allow you to link bank accounts, other financial accounts receivable, and card accounts to import data automatically.
  • Use a budgeting app. Budgeting apps help you create and manage monthly budgets and typically provide tracking capabilities for linked accounts. With a budgeting app, you can see a summary of your expenses and finances throughout the month to spot any issues in real-time.
  • Find a system. What worked for someone else might not work for you. Find the most suitable banking tracking system for you and your situation. Try several methods, and then follow the one that gives you the most accurate logging.

Examples of bank reconciliation statement example

Say you run a business. You can do the reconciliation when receiving the month-end statement or through your online banking details.

Let’s take a bank reconciliation statement example to better understand the calculation of an example bank reconciliation. An example of a bank reconciliation statement example is as follows:

Example of bank reconciliation – 1

X company has a cash book balance of $2000 as of February 27, 2019. As of February 27, 2019. The cash book balance is $1970. Additional details are as follows:

  • A check for $500 was deposited but not received by the bank.
  • A bank bill of $70 is recorded in the passbook but not in the cash book.
  • A check for $400 was written but not presented for payment.
  • The bank’s interest rate of $200 is recorded in the passbook but not in the cash book.

Bank reconciliation examples and solutions:

X company Bank Reconciliation Statement as of March 31, 2019, is:

Particulars:

Balance as per pass book: $2000

Add: Cheque deposited but not collected: $500

Bank charges not recorded in passbook: $70

Less: cheques received but not presented for payments: $400

Bank interest earned but unrecorded in passbook: $200

Balance as per cash book: $1970

Example of bank reconciliation – 2

Y company has a Savings Book balance of $12,000 as of April 31, 2018. Here are other details:

  • Three checks for $1,000, $2,500, and $3,500 were deposited in the bank on April 30, 2018, but recorded on the May 2019 bank statement.
  • Checks for $600 dated April 31, 2018, are not presented for payment.
  • A dividend of $2,000 per share is credited to the bank account but not posted to the ledger.
  • A direct deposit of $500 into a bank account was made by a customer who did not keep the books.
  • A bank fee of $200 is introduced in the bank book only.
  • As of April 31, 2018, the cash book balance was $16100.

Examples of bank reconciliation Answer:

Y company Bank Reconciliation Statement. as of April 31, 2018

Particulars:

Balance as per pass book: $12,000

Add: Cheque deposited but not collected: $1,000+ $2,500+$3,500 =$7000

Bank charges recorded only in passbook: $200

Less: cheques received but not presented for payments: $600

Dividend collected by banks: $2000

Direct deposit not recorded in passbook: $500

Balance as per cash book: $16100

Bank reconciliation examples and solutions – 3

According to the cash book and account statement, Z Company has a difference in balance as of December 31, 2019. We recommend that you make an example of a bank statement from this date with the following information:

  • As of December 31, 2019, the balance in the checking account was $6,000. The balance, according to the general ledger, is $1600.
  • Check the $1,500 and $500 made on December 30, 2019, but still not clear.
  • The insurance premium paid by the bank is $300. Not recorded in the cash book.
  • Check out for $3000, duplicated in the general ledger. It is properly recorded in the example of a bank statement.
  • Pay a double-stamped $500 check on PassBook.
  • The $600 dividend received is only reflected in the bank statement and not in the cash book.
  • A check for $800 was deposited on December 29, 2019. But not yet received.
  • The $200 bank fee is only charged to PassBook Bank.

Bank reconciliation example Answer:

Z Company Bank Reconciliation Statement. as of December 31, 2019

Particulars:

Balance as per pass book: $6,000

Add: insurance premium paid by the bank: $300

Cheque recorded twice in passbook:$500

Cheque deposited but not yet collected:$800

Bank charges debited only in passbook: $200

Less: cheques received but not presented for payments: $1500+$500=$2000

Cheque recorded twice in passbook: $3000

Dividends received but recorded only in bank statement: $600

Balance as per cash book: $2200

Conclusion:

The bank reconciliation accounting example is a valuable tool for identifying differences between cash book balances and bank statements. Learning Bank reconciliations accounting examples also help uncover fraud and manipulation. It is good practice to do this exercise regularly, which helps to keep the organization in check. It also keeps the cash book up to date, as transactions that are properly recorded in the statement of accounts can be recorded in the cash book.

The main purpose of reconciling your bank account is to find the difference between the amount in your bank and the amount in your business account. Reconciliation helps you determine whether a check has been rejected or cashed without your knowledge, identify fraudulent transactions, and report both situations promptly.

By doing this diligently, you will keep your books error-free ahead of the annual audit cycle, where auditors review your bank records as part of their regular analysis.