How to prepare bank account reconciliation

5. Bank account reconciliation template

Let's now take a look at how a bank account reconciliation is prepared (see a bank reconciliation template in Illustration 2):

Illustration 2: Bank account reconciliation template

Adjust cash account in general ledger (Section 1)

Balance per cash account in general ledger

___

 

Adjustments to cash account (based on bank statement):

 

Add:

Bank interest

___

   

Credit / wire transfers

___

 

Subtract:

Bank charges

___

   

Standing orders

___

   

Direct debits / ACH

___

   

Dishonoured checks

___

 

Add/Subtract:

Errors

 

Adjusted cash account in general ledger

X

       

Adjust balance on bank statement (Section 2)

Balance per bank statement

___

       

Adjustments to bank statement balance (based on accounting records):

 

Add:

Deposits in transit

___

 

Subtract:

Checks issued, but have not cleared bank

___

 

Add/Subtract:

Bank errors

 

Adjusted balance per bank statement

Y

       

Compare adjusted balances (Section 3)

Adjusted cash account in general ledger

X

Adjusted balance per bank statement

Y

Difference

Z

       

Reconciling items

 
 

Item a short description

___

 

Item b short description

___

 

 

Total reconciling items (= Difference)

Z

       

You can utilize an Excel bank account reconciliation template and modify it to your needs.

Each section in the template serves a specific purpose. Thus, before a reconciliation statement can be prepared, cash balance in the general ledger and the cash balance on the bank statement need to be adjusted to ensure both reflect all relevant transactions. Sections 1 and 2 complete this task. Then, in Section 3 the adjusted balances are compared to determine if there are differences and if there are, such differences (reconciling items) are investigated and adjusted (if need be). Let's look at each section in more detail.

Adjust cash account in general ledger (Section 1)

Usually a company does not know about some transactions that need to be posted to the ledger until the company receives a bank statement. Section 1 of the bank account reconciliation is where information from a bank statement is used to show such adjustments to the cash account(s). As you can see from the template, some adjustments increase the cash balance while others decrease it. For example, bank interest increases the company's cash balance and thus, it needs to be added (debited) to the cash balance in the accounting records. On the other hand, bank charges decrease the cash balance and thus, they need to be subtracted (credited) from cash in the accounting records. Note that any adjustments in this section are reflected by the bank on the bank statement, but usually are not recorded by the company in the accounting records. Therefore, any adjustments made to cash account based on a bank statement must be posted to accounting records. For example, if a bank statement shows interest of $43 for the month, then the following journal entry should be recorded in the ledger:

Account Titles

Debit

Credit

Cash

43

 

     Interest Income

 

43

On the other hand, bank charges of $250 should be recorded as:

Account Titles

Debit

Credit

Bank Charges (Bank Expense)

250

 

    Cash

 

250

If the adjusted balance is positive (debit balance), then there are funds at the bank which should be reported on the balance sheet as a current asset. If the adjusted balance is negative (credit balance), then the bank account is overdrawn. A negative amount should be recorded as a current liability on the balance sheet because it represents temporary borrowing by a company from its bank.

Adjust balance on bank statement (Section 2)

Section 2 shows how to adjust balance from a bank statement for timing differences and bank errors. As these items (deposits in transit; checks issued, but have not cleared the bank) have already been recorded in the cash register, no journal entries are required. However, because the bank did not record such transactions yet, the amount on the bank statement should be adjusted before comparing it to the balance in cash register. For example, if a check for $300 has been received on July 31, and was not yet recorded by the bank until August 1 (it is only a matter of time), then there is a difference between bank balance and balance in the accounting records. To fix this difference for the purpose of bank reconciliation, the $300 should be added to the balance per bank statement.

Compare adjusted balances (Section 3)

In Section 3 the adjusted balances from Section 1 and Section 2 are compared. If the two adjusted balances match, then the bank reconciliation is completed successfully. If there are two different numbers after the reconciliation process, then some investigation is needed. One of the explanations is that beginning balances are incorrect. It is recommended to repeat the process of reconciliation until the balances agree. If there is an error, go ahead and correct it. If the bank has made an error, you should adjust for it on your reconciliation statement and inform the bank about this error.

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