Bank Reconciliation Statement | Definition | Examples

What do you mean by bank reconciliation?

Although banks have highly sophisticated systems, there is a possibility that they make a mistake. At the end of every month, a bank supplies its customers with records (bank statement) arranged by its representatives. An organization requires its accountant to update the general ledger all the time. Mistakes that may happen incorporate recording wrong amount and charging to a wrong account holder. In addition, regardless of the fact that both the bank and the organization record their transactions effectively, contrasts between the bank statement and the organization’s cash book may occur as a consequence of the time lag in recording transactions. A basic internal control compares the items shown on the bank statement with the cash book entries. This is accomplished by setting up a schedule called a bank reconciliation statement.

Cambridge Dictionary defines Reconciliation as:

  1. “reconciliation” in American English as the process of making two people or groups of people friendly again after they have argued seriously or fought and kept apart from each other, or a situation in which this happens.

  2. “reconciliation” in Business English as the process of comparing different financial accounts, amounts, etc. in order to check that they add up to the same total or to explain any differences between them.

Why do we need to do reconciliation?

When comparing the things in your cash book and the things appeared on the bank statement, you may see that a few things indicated accurately on the bank statement may not show up in your records. Similarly, a few things indicated accurately in your records may not show up on the bank statement.

Bank can make deductions from the organization’s account on the basis of the following typical reasons:

  • interest charges on a loan
  • repayment of a bank loan
  • bank charges
  • electronic fund transfers (EFTs): automated cash payments

Bank can make deposits to the organization’s account on the basis of the following typical reasons:

  • interest income directly deposited to the account
  • payment directly deposited to the account
  • EFTs: automated cash receipts

Bank Reconciliation Process

Direct Deposit to the Bank Account

The bank may make a direct deposit to the organization’s account, for example, interest earned on the bank balance. The organization would be ignorant of the amount until it gets the bank statement.

GENERAL LEDGER – BANK

DateExplanationDebitCreditBalance
June 1Opening Balance5,000
June 2Check # 13004,700
June 3Check # 25004,200
June 10Check # 37003,500

BANK STATEMENT

DateExplanationWithdrawlDepositBalance
June 1Opening Balance$5,000
June 2Check # 1$3004,700
June 3Check # 25004,200
June 10Check # 37003,500
June 30Interest$5$3,505

Above bank statement shows that the bank has made a direct deposit to the organization’s account with interest income of $5. But the organization is unaware of this transaction until it gets a bank statement from the bank at the end of the month. Bank has made this transaction on Jun 30th. Since this transaction is not yet recorded in the general ledger or cash book of the organization, balance on the bank statement and on general ledger do not match. General ledger shows a balance of $3500 while the bank statement shows $3505. Now the bank reconciliation statement would look like this:

ABC Company Bank Reconciliation

June 30, 2010

LedgerBank
Balances as per records$3,500$3,505
Add: unrecorded deposits
Interest June 305
Corrected Balance$3,505$3,505
The adjusting entry in the general ledger would be as follows:

GENERAL JOURNAL

DateDescriptionDrCr
June 30Cash5
Interest Revenue5
(Record interest earned for the month of June)

Direct Charge to the Bank Account

As direct deposits, there may be direct charges to the bank account. Bank may charge the organization’s account with monthly bank charges, SMS service charges or an annual charge. The organization will be unaware of such charges until it gets the bank statement.

For example, organization’s general ledger-bank shows a balance of $3500 while the bank statement shows $3450. All other transactions are recorded in both general ledger account and bank account except the bank charges that the bank charge to the organization’s account on Jun 30th. Organization’s accountant should update the ledger account after comparing the ledger account and the bank statement.

GENERAL LEDGER – BANK

DateExplanationDebitCreditBalance
June 1Opening Balance5,000
June 2Check # 13004,700
June 3Check # 25004,200
June 10Check # 37003,500

BANK STATEMENT

DateExplanationWithdrawlDepositBalance
June 1Opening Balance$5,000
June 2Check # 1$3004,700
June 3Check # 25004,200
June 10Check # 37003,500
June 30Bank Service Charge50$3,450
The bank reconciliation would look like this:

ABC Company Bank Reconciliation

June 30, 2010 

LedgerBank
Balances as per records$3,500$3,450
Add: Unrecorded Charges
Bank Service Charge June 30(50)
Corrected Balance$3,450$3,450

The adjustment to the general ledger would be made with the following entry:

GENERAL JOURNAL

DateDescriptionDrCr
June 30Bank Service Charge50
Cash50
(Record Bank Service Charge for the month of June)

Non-Sufficient Funds (NSF Checks)

Sometimes this happens that a customer makes the payment through check but the organization cannot collect the payment due to insufficient balance in the customer’s bank account.

For example, the organization receives a check amounting to $500 from one of its customers and deposit it to the organization’s bank account for collection. But unfortunately, bank returns the check to the organization mentioning the reason NSF Checks and also charges an additional amount of $10 as bank service charge to the organization’s bank account. In this situation the bank reconciliation would be as follows:

ABC Company Bank Reconciliation

June 30, 2010 

LedgerBank
Balances as per records$5,010$4,500
Less: NSF Check(500)
Charges for NSF Check(10)
Corrected Balance$4,500$4,500

The journal entries should also be made to general journal and ledger account to reflect this fact. See the entries given below:

GENERAL JOURNAL

DateDescriptionDrCr
June 30Accounts Receivable500
Cash500
(Record NSF Check returned by Bank )

GENERAL JOURNAL

DateDescriptionDrCr
June 30Bank Service Charge10
Cash10
(Record Bank Service Charge from NSF Check )

Outstanding Deposits

Outstanding deposits are those deposits that have been recorded in the organization’s general ledger, however, not appeared on the bank statement. This can happen when the organization makes a deposit in the bank account on the last day of the month, however, the bank does not record the deposit until the next business day. The organization’s ledger account and the bank statement may look like the following:

GENERAL LEDGER – BANK

DateExplanationDebitCreditBalance
June 1Opening Balance5,000
June 2Check # 13004,700
June 3Check # 25004,200
June 10Check # 37003,500
June 30Deposit1,0004,500

BANK STATEMENT

DateExplanationWithdrawlDepositBalance
June 1Opening Balance$5,000
June 2Check # 1$3004,700
June 3Check # 25004,200
June 10Check # 37003,500
As you can see bank statement shows a balance of $3500 while the organization’s ledger account shows $4500. The reason is that a deposit amounting to $1000 is recorded in the ledger account successfully but the bank did not yet record the deposit of $1000 because it was deposited on the last working day i.e. June 30. It will be processed by the bank on the next working day and will be shown in the bank statement on the July 1st.

Now the bank reconciliation may look like following:

ABC Company Bank Reconciliation

June 30, 2010 

LedgerBank
Balances as per records$4,500$3,500
Add: Outstanding Deposit June 301,000
Corrected Balance$4,500$4,500

In this case, no adjustment is required because organization’s ledger account is already updated, only the bank account is required to be adjusted. Therefore just bank account column is adjusted with $1000 in the bank reconciliation statement of ABC company as on June 30, 2010. There is only a time lag between recording the transaction, the outstanding deposit will be shown in the bank statement on the next business day (i.e. 1st July).

Outstanding Checks

Outstanding checks are those checks which are issued by the organization for the payment to the suppliers. When the organization issues the check, it mails the check to the supplier and the supplier may take about 2 to 3 business days to deposit the check to his bank for collection.

In the following ledger account, three checks have been reflected on 28,29,30 June amounting to $400,$800,$700 respectively.

GENERAL LEDGER – BANK

DateExplanationDebitCreditBalance
June 1Opening Balance5,000
June 2Check # 13004,700
June 3Check # 25004,200
June 10Check # 37003,500
June 15Deposit1,0004,500
June 28Check # 44004,100
June 29Check # 58003,300
June 30Check # 67002,600

BANK STATEMENT

DateExplanationWithdrawlDepositBalance
June 1Opening Balance$5,000
June 2Check # 1$3004,700
June 3Check # 25004,200
June 10Check # 37003,500
June 17Deposit$1,0004,500

All the three checks have not been recorded by the bank yet. Therefore these three checks are outstanding.

In this case, the bank reconciliation will be as follows:

bank reconciliation statement

In this adjusted case no adjustment is required because the organization’s ledger account is already updated and reflect all the outstanding checks only the bank column in the bank reconciliation is adjusted with the outstanding checks.

Bank Errors

Bank errors are the mistakes made by the bank. The organization’s ledger shows the correct balance and the bank have to correct the mistake or error. This can happen when the bank erroneously charges other organization’s check to our organization’s bank account.

Consider the following;

GENERAL LEDGER – BANK

DateExplanationDebitCreditBalance
June 1Opening Balance5,000
June 2Check # 13004,700
June 3Check # 25004,200
June 10Check # 37003,500

BANK STATEMENT

DateExplanationWithdrawlDepositBalance
June 1Opening Balance$5,000
June 2Check # 1$3004,700
June 3Check # 25004,200
June 10Check # 1088003,400
June 27Check # 37002,700
In the above bank statement, the bank has charged the organization’s bank account with “check #108” which belongs to another company or organization. In this case, the organization’s accountant will contact the bank and inform about the bank error. Now the bank reconciliation will be as follows:

bank reconciliation examples

Also correct in this case, no adjustment is required as the organization’s ledger is showing the correct balance.

Recording Errors

As banks can make mistakes, the organization’s accountant can also make mistake. Such mistakes are known recording errors. These errors appear only in the organization’s records and not in the bank account. For example, the accountant recorded $950 check but the correct amount was $590. The bank has recorded it correctly as $590 in the bank account. As you can see below:

GENERAL LEDGER – BANK

DateExplanationDebitCreditBalance
June 1Opening Balance5,000
June 2Check # 13004,700
June 3Check # 29503,750
June 27Check # 37003,050

BANK STATEMENT

DateExplanationWithdrawalDepositBalance
June 1Opening Balance$5,000
June 2Check # 1$3004,700
June 3Check # 25904,110
June 27Check # 37003,410
In the bank reconciliation the account will have to cancel the wrong amount and record the correct amount as follows:

bank reconciliationAs the correction was made in the ledger column, an adjusting entry must also be passed (assume that the check was issued for the payment of inventory) as follows:

GENERAL JOURNAL

DateDescriptionDrCr
June 30Cash950
Inventory950
(To Cancel Check of June 3 recorded in wrong amount )

GENERAL JOURNAL

DateDescriptionDrCr
June 30Inventory590
Cash590
(Record correct amount of check for inventory of June 3)

We should carefully analyze and correct any other differences between the balances of bank statement and the organization’s ledger account. So this is all about the bank reconciliation statement.

Summary
Bank Reconciliation
Article Name
Bank Reconciliation
Description
Reconciliation compares the items on the bank statement with the cash book entries its done by setting up a schedule called a bank reconciliation statement
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