Bank reconciliation is the process of matching the company's cash book with bank statements. The goal is to examine each transaction and identify any errors or possible fraud.
The two ledgers generally do not match due to factors such as bank fees, interest, outstanding checks, and deposits in transit. These discrepancies must be accounted for on a bank reconciliation statement to accurately represent the current financial situation.
In this blog, we will present some real-life examples of bank reconciliation statements and help solve the major problems we face during bank reconciliation.
What is a bank reconciliation statement?
A bank reconciliation statement is a financial document that compares the company's cash book to bank statements to ensure the accuracy and consistency of financial records. This process helps the company monitor and update its funds, addressing any discrepancies that may arise. If inconsistencies are identified, they must be rectified or adequately explained.
The bank reconciliation process thoroughly investigates the causes of discrepancies between the two accounts. Several reasons contribute to such discrepancies:
- Bank charges – Bank accounts may incur overdraft fees, account maintenance fees, or other penalties that may not have been noted in the company's cash book. Alternatively, any interest earned on the bank balance should be accounted for in the cash book.
- Outstanding checks – Checks issued to suppliers may not be presented but posted to the general ledger. Delays in bank processing could also result in checks not being reflected on your statement until the end of the enrollment period.
- Payment delays: Payments made through ACH or Wire may take up to several days to reach the bank. This may cause the transaction to not appear on the statement.
- Accounting/banking error: The bank or company accountant could have made an error when accounting for a transaction. Common examples are late payments, double payments, or refunds.
Common Examples of Bank Reconciliation Statements
Now let's look at examples of real-life bank reconciliation statements and the type of problems you may face:
Bank charges
XYZ Corp's bank balance as of December 31, 2023 is $10,000, while the cash book balance is $10,300. The variance is attributed to specific bank charges. Let's examine the transactions:
- A $200 fine was incurred due to a bad check, recorded on the bank statement but not in the cash book.
- $300 was charged as an annual bank maintenance fee, recorded on the bank statement but not in the cash book.
- A dividend of $100 was disbursed from the stock portfolio, recorded on the bank statement but not in the cash book.
- A quarterly interest payment of $100 by the bank, recorded on the bank statement but not in the cash book.
Outstanding Checks – Bank Balance > Cash Book Balance
XYZ Corp has a bank balance of $10,000 as of December 31, 2023, while the cash book balance is $9,000. The lower cash balance is attributed to outstanding checks. Let's examine the transactions:
- Two checks totaling $1,400 were issued but have not yet been processed. This transaction is recorded in the cash book but not in the bank balance.
- An incoming payment of $400 from a customer has been initiated but has not yet cleared the bank. This transaction is recorded in the cash book but not in the bank balance.
- A quarterly interest payment of $100 by the bank is documented on the bank statement, but is not included in the cash book.
Late Payments – Cash Balance > Bank Balance
XYZ Corp has a bank balance of $20,000 as of December 31, 2023. However, the cash book balance is $18,000, reflecting a higher balance due to bank delays where certain transactions were not recorded by the due date . These transactions were recorded on January 3, 2024. Let's explore the details:
- Two checks totaling $4,000 were issued but have not yet been processed. These are marked in the cash book but are not reflected in the bank balance.
- An incoming payment of $2,000 via ACH was processed four days after it was initiated. Although it was marked December 31 in the cash book, it appears in the bank statement on January 4.
accounting errors
XYZ Corp has a bank balance of $20,000 as of December 31, 2023. However, the cash book balance is $15,000. Following the investigation, errors were identified in the accountant's recording of payments. Let's examine the transactions:
- A check for $2,000 was issued but was never recorded in the cash book.
- A vendor payment of $500 was mistakenly posted twice on separate dates even though it was processed only once.
- An incoming payment of $500 was mistakenly entered as $5000.
- A $1,000 transaction could not be processed and was later refunded.
Banking errors
XYZ Corp has a bank balance of $10,000 as of December 31, 2023. However, the cash book balance is $12,000. Bank balance is less due to some banking related errors:
- The customer's payment of $1,000 is not reflected because the customer made a mistake with the account number.
- The bank transaction failed and the $1000 refund has not been processed.
- The bank statement shows an error where an incoming transaction of $1000 is posted as $3000.
- The bank lost or misplaced your check for $2,000.
Banking errors can be disputed with the bank and resolved. Bank reconciliation is vital to discovering such errors in time within the dispute deadlines!
Alternative bank reconciliation format
In the above method, we accounted for several transactions that created discrepancies between the cash book and the bank balance. Alternatively, companies “adjust” the ledgers to prepare a bank statement. In this method:
Step 1: Adjust bank balance
Bank statements must be adjusted by adding outstanding deposits (deposit in transit) and deducting outstanding outgoing checks (outstanding checks). The logic here is:
Bank Balance + Deposits in Transit – Outstanding Checks = Adjusted Bank Balance
Step 2: Adjust cash books
The cash book balance needs adjustments to account for banking service fees, accrued interest, and returned checks (NSF checks). The logic here is:
Cash Book Balance + Interest – Bank Fees – Returned Checks = Adjusted Cash Book
How to speed up bank reconciliation?
Bank reconciliation is a tedious process with several manual steps. A more efficient approach is to adopt bank reconciliation software, which reduces manual errors and improves organization and time savings through automation.
Bank reconciliation tools primarily employ two reconciliation methods: document review and analysis review. In Document Review, OCR-powered software extracts relevant data from documents and presents it in the required format. Automation tools like Nanonets go a step further and allow users to define rules to detect anomalies, duplicates, and discrepancies. If the software can identify discrepancies, it significantly simplifies the reconciliation process by more than 90%.
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