Bank reconciliation is a very important accounting process which ensures that all cash balances recorded in a company’s accounts are correctly stated to be those maintained in the bank account. The process involves checking any differences in the reconciliation report as issued by the bank and maintaining the company’s books. Here’s how one can prepare the bank reconciliation clearly, step by step:
Step 1: Collect All Needed Paperwork
Before reconciliation starts, all documents needed to be reconciled are obtained to ensure accuracy and timeliness. Some of the important documents include:
Bank Statement: This is the statement of account issued by the bank for every month indicating all the transactions carried out in the account within the period. The statement should be for the whole period the reconciliation is being done.
Cash Book or Ledger: This is the record of all the transactions in the bank and cash account of the company. Often it appears as a subsidiary to accounting software. Sometimes, it exists as a manual ledger.
Step 2: Compare Opening Balances
Start off by comparing the opening balance on the bank statement with that of the cash book’s opening balance for the period. In case the figures do not correspond, then it might be due to having prior-period adjustments, unresolved bank errors, or a difference in transactions recorded differently between the two periods. It is, therefore, very crucial to clear any discrepancies existing from previous months before proceeding.
Step 3: Check Deposits
Compare cash deposits in the book with those appearing in the bank statement. Register each deposit that you found in the cash book in the bank statement. Common reconciling items to look for are:
Deposits in Transit: These are deposits that were recorded in the cash book but not yet featured in the bank statement. It can be attributed to a lag effect of timing where, for instance, a company deposits at the end of the month. It might appear on the bank statement on the following month.
If there are no deposits in the bank statement, then treat them as deposits in transit and add them onto the bank statement balance at the time of adjustment.
Step 4: Review Withdrawals and Payments
Check each withdrawal or payment listed in the cash book and check it against the bank statement. Amongst the most common types of discrepancies are:
Outstanding Checks: These are checks issued by the company but yet to be cleared by the bank. They should feature on the cash book but could yet not feature on the bank statement due to processing lags. Outstanding checks should, therefore, be deducted from the balance on the bank statement.
The third important aspect of reconciliations has to do with ascertaining that amounts recorded are identical to those reflected in the bank statement. Sometimes, mistakes crop up in the cash book when wrong amounts are recorded or maybe even at the bank, during processing.
Step 5: Identify Other Bank Fees or Credits
They consist of bank fees, charges, or credits which sometimes are not recorded on the books of the company immediately. Examples include the following:
Bank Fees: These refer to charges put on different services by banks, whether account maintenance fees, overdraft fees, or wire transfer fees.
Interest Earned: If you have accounts that earn interest, the statement by the bank is likely to contain quite a few interest credits which will find their way into the cash book.
Other Miscellaneous Improvements: This may include errors on a particular bank or changes concerning deposited checks, direct deposits, and other direct entries.
These things need to be added or deducted from the cash book only then will the cash book reconcile with the bank statement.
Step 6: Fix Errors
During reconciliation, you might encounter errors from the bank or company’s side. If your cash book contains errors-for example, a wrong figure is inputted, then correct those figures in your cash book. If the errors found are on the bank’s side, you’ll have to sort those with the bank. Record all errors with clear notations so you can make your reconciliation transparent and comprehensive.
Step 7: Compute the Adjusted Balances
Having all the adjustments for deposits in transit, outstanding checks, bank fees, and errors, compute now the adjusted bank and cash book balances. The adjusted balances should now balance. Here is one simple format to check the adjusted balance:
Bank balance per the bank statement.
+ Deposits in transit
– Outstanding checks
Adjust for bank fees, interest, etc.
Hence, the balance in the bank account should be equal to the bank balance adjusted by the cash book.
Step 8: Record the reconciliation in financial records
Once done, your bank reconciliation should be well documented in your accounting records. Most accounting software allows for storage of reconciliation reports, and these can be reviewed if there is an audit or by financial management to verify accuracy. Bank reconciliations are usually part of month-end closing processes; thus, cash balances should be accurate before financial reporting.
Step 9: Keep an audit trail
Keeping all reconciliation records, discrepancy accounts, and adjustments of account is quite important. An audit trail also serves to ensure the reconciliation over time is evidenced that internal controls are in place. It is also useful when discrepancies occur. Discrepancies could be easily reviewed prior to the adjustments that may have been done in the past.
This process is considered an important financial management practice, checking if the recorded cash balance actually reflects the actual bank transaction. With the following: collecting documents, checking on deposits and withdrawals, adjusting to the presence of bank fees or errors, and calculating for adjusted balances, business ensures their records stay accurate and reliable. Consistent accurate reconciliation of banks instils trust in the financial statement, aids in fraud detection, and increases cash management efficiency, which is important to everyone who has to take care of company finances.