What is the bank reconciliation statement?
The process of accounting for the differences between the balance appearing on the bank statement and the balance of cash according to the depositor’s records.
One of the procedures for establishing the correct cash balance (and for controlling cash) is the reconciling of the bank and book cash balances. The bank reconciliation explains the difference between the balance in the company’s records and the balance in the bank’s records. When completed, the reconciliation should show the correct cash balance. The differences arise from three sources: items in transit, errors, and service charges.
Items in transit arise from several circumstances. The firm’s account may contain a debit entry for a deposit that was not received by the bank prior to the statement date. Similarly, some of the checks credited to the ledger account will probably not have been processed by the bank prior to the bank statement date. Banks often record other decreases or increases to accounts and notify the depositor by mailed notices.
Examples include deposited checks returned for non-sufficient funds (NSF) or notes collected on the depositor’s behalf. Because these items are generally reported to the company prior to the bank statement date, they seldom appear on a reconciliation.
Needs and importance of bank reconciliation statement
The need and importance of Bank Reconciliation Statement can be imagined after reading the following points:
- It provides a mechanism of internal control over cash.
- It brings into focus errors and irregularities while dealing with the cash.
- It reflects the actual bank balance position.
- It prevents fraud in recording banking transactions.
- It helps to detect any mistake in Cash Book and Bank Statement.
- It explains any delay in the collection of cheques.
- It identifies valid transactions recorded by one party but not by the other.
Format of bank reconciliation statement
This takes the following format:
If, however, the cash book shows an overdraft (Cr. Balance per cash book but Dr. balance per bank statement), the bank reconciliation takes the following format:
How time intervals impact a bank reconciliation statement
A Bank Reconciliation Statement is prepared at the end of the month. The entries in this statement cease to cause difference after a few days. For example, if a businessman issues a cheque for say $2,500 to one of his suppliers on 28 May, it is quite possible that this cheque may not be presented by that supplier to his bank till say 5 June.
The bank statement by the businessman at the end of May will not have an entry for this cheque while the cash book would have the entry – thereby causing a difference of $2,500 in the two balances. But on 5 June when the bank pays this cheque, the difference will cease to exist.
Similarly, if a businessman deposits any cheques on the last day of the month, these cheques may be collected by his bank and shown on his bank statement three or four days later. While this will cause a difference in balances at the end of the month, the difference will automatically correct itself once the cheques are collected by the bank.
Hence, at the end of each month, the first thing to do is to consult the bank reconciliation statement prepared at the end of the previous month. The items there-in should be compared to the new bank statement to check if these have since been cleared. If so, these entries will not appear in the bank reconciliation statement prepared at the end of the current month.
This is an important fact as it brings out the status of the bank reconciliation statement. A bank reconciliation statement is only a statement prepared to stay abreast with the bank statement; it is not in itself an accounting record, nor is it part of the double entry system.
The following is the bank column of cash book prepared by Sara Loren for May 2017:
She received the following bank statement for May 2017:
A careful comparison of the above two documents would disclose the following:
(a). Deposits made by Sara Loren on 30 May, $1,810 and on 31 May, $2,220 have not been credited to the bank statement.
(b). Cheque No. 789 and 791 for $5,890 and $920 respectively do not appear on the bank statement, meaning these had not been presented for payment to the bank by 31 May.
(c). A deposit of $5,000 received by the bank (and entered in the bank statement) on 28 May doesn’t appear in the cash book. This must be a direct deposit received by the bank.
(d). Cheque deposited on 14 May ($2,540) was .returned unpaid on 17 May. The cash book does not have a record of dishonor.
(e). Standing order payment of $1,500 (for rent) also fails to appear in the cash book.
(f). The Cash Book doesn’t have a record of bank charges, $70, raised on 31 May.
It is apparent that the cash book should be updated by recording therein items (c) to (f) listed above. The completed Cash Book should then be balanced. It would appear as follows:
The Dr. balance shown in the completed cash book is $7,090 while the bank statement shows a Cr. balance of $9,870. A bank reconciliation statement must, therefore, be prepared as follows: