Bank Reconciliation

Introduction to Bank Reconciliation

mini-lectures - Bank Reconciliation A Bank reconciliation is a process that explains the difference between the bank balance shown in an organization's bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records at a particular point in time.

Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the organization’s books, or either the bank or the organisation itself has made an error.

You’ve probably reconciled your personal checking account at least a few times over the years, and youíll be happy to hear that reconciling business accounts is a similar process.

Because most companies write hundreds of checks each month and make many deposits, reconciling the amounts on the company's books with the amounts on the bank statement can be time consuming. The process is complicated because some items appear in the company’s Cash account in one month, but appear on the bank statement in a different month. For example, checks written near the end of August are deducted immediately on the company’s books, but those checks will likely clear the bank account in early September. Sometimes the bank decreases the company's bank account without informing the company of the amount.

The process of reconciling the bank accounts for your business refers to proving out cash ó verifying that what you have in your business’s bank accounts actually matches what the bank thinks you have in those accounts.

Before you reconcile your accounts, it’s important to be sure that youíve made all necessary adjustments to your books. When you make adjustments to your cash accounts, you identify and correct any cash transactions that may not have been properly entered into the books. You also make adjustments to reflect interest income or payments, bank fees, and credit-card chargebacks.

If you’ve done everything right, your accounting records should match the bank’s records when it comes to how much cash you have in your accounts. The day you close your books probably isnít the same date as the bank sends its statements, so do your best at balancing the books internally without actually reconciling your checking account.

Correcting any problems during the process of proving out will minimize problems you may face reconciling the cash accounts when that bank statement actually does arrive.

After you adjust the balance per bank to be the true balance and after you adjust the balance per books to also be the same true balance, you have reconciled the bank statement. Most accountants would simply say that you have done the bank reconciliation or the bank rec.


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