How to prepare bank account reconciliation
3. Two types of account reconciliations
Depending on what account balances (or sets of records) are reconciled, there are two types of account reconciliations:
Bank reconciliations compare bank's records (from bank statements) with the company's general ledger (cash accounts). In this case an external source (bank statements) is used in preparing reconciliations. Bank reconciliations assist in ensuring that the company’s records (general ledger cash account, etc.) and the bank’s records are complete and correct.
General ledger to sub-ledger reconciliations agree general ledger balance with the total of a sub-ledger (i.e., supporting schedules, etc.). This type is the most suitable for accounts receivables, accounts payables, fixed assets, prepaid accounts, and so on. In this case an internal source (sub-ledger) is used and compared to the ledger balance.
4. Step-by-step instructions for bank account reconciliation
When a company receives a bank statement, the company should check that the amounts on the bank statement agree to the amounts in the cash accounts in the general ledger (or cash register). In some cases there are differences. Let's consider the reasons why the differences may occur (refer to Illustration 1):
Illustration 1: Differences between a bank statement and cash accounting records
1 |
Items recorded in cash book, but not on the bank statement (timing differences) |
|
1.1 |
Checks issued, but have not cleared the bank |
After a check is issued, it may take some time before its holder presents it to the bank. Therefore, a bank statement would not show such checks until they are presented to the bank, but the company has already recorded such checks as cash deductions in their cash account(s). |
1.2 |
Deposits in transit |
Checks or amounts received and deposited into the bank account, but not yet processed and recorded by the bank. Similar to checks, such deposits have been recorded by the company, but are not yet reflected on a bank statement. |
2 |
Items on the bank statement, but not in cash book |
|
2.1 |
Bank interest / charges |
Interest or charges already recorded by the bank, but not by the company as the company didn't know about them until the company received the bank statement. |
2.2 |
Standing orders |
A bank has a right to pay fixed amounts at regular intervals to another account. Such orders are given to the bank by the bank customer (the company). Usually the company may not know or record such amounts until a bank statement is received. |
2.3 |
Direct debits / ACH |
An instruction / permission that a bank account holder gives to another company to deduct amounts directly from its bank account. Direct debits are primarily used in Europe. In the United States, an equivalent is an ACH transfer initiated by a withdrawing party (biller). Again, the company may not know or record such amounts transferred until a bank statement is received. |
2.4 |
Credit / wire transfers |
An incoming transfer of money from one bank account to another. For example, a company returns goods purchased from its suppliers and receives the money back from them directly into the company's bank account. |
2.5 |
Dishonored check |
For example, a company's payer does not have enough money to cover the payment by check or the check is post-dated. The company has already recorded the check as a cash receipt in the cash register and ledger, but no cash was deposited into the company's bank account and is shown on a bank statement. |
3 |
Cash book errors or bank errors |
|
3.1 |
Cast errors |
A transaction is recorded to an incorrect account. |
3.2 |
Transposition |
A figure in the amount is transposed by mistake. |
3.3 |
Omissions |
A transaction is not recorded. |
3.4 |
Duplications |
A transaction is posted twice. |
Any differences noted should be evaluated and corrected in the accounting records. Note that sometimes a bank has an error in the bank statement, in which case the company should contact the bank to resolve it.
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