Application of Bank Reconciliation Statement: Why Businesses Compare Their Cash Records

 

According to the business's accounting records, it has $75,000 in cash, but its bank statement indicates that it has $72,800 in cash. The difference at a first glance may lead one to believe that there is a mistake. Truth is, variations such as these are quite normal as transactions can often not be recorded at the same time, by both the business and the bank.

This will be helped by the bank reconciliation. It will reconcile the company's cash books to the bank statement, check for any discrepancies and ensure the cash books are correct after making the proper adjustments. One of the easiest measures to enhance the financial control and minimize the risk of financial errors is to conduct a financial reconciliation regularly.

What Is a Bank Reconciliation Statement?

A bank reconciliation statement is a statement which shows a comparison of the balance of the cash book with the bank statement for the same period.

The intent is not to update the bank's records, but to give explanation as to the difference in bank balances. Some of the most common differences are caused by outstanding cheques, deposits that haven't been cleared, bank service charges, interest income or recording errors.

After all of the reconciling items have been identified, the adjusted balances should agree. This enables management to be confident of the reported cash balance being valid.

Application of Bank Reconciliation Statement

Many transactions are carried out in a day-to-day basis financial activity that use a bank reconciliation statement.

It is one of its primary uses is for the check and verification of cashbooks. When your internal accounting records are compared to the bank statement, businesses have the opportunity to find missing transactions, duplicate entries, or typical bookkeeping errors, before they become an issue in financial reporting.

The other benefits of reconciliation include fraud prevention. Bank records are easier to follow if reviewed on a regular basis to be able to easily detect unauthorised withdrawals, altered payments or unexpected bank transactions.

Moreover, reconciled cash balances are frequently used by lenders, auditors and business owners as they give them more confidence in the financial statements.

Bank Reconciliation Example

Set up a company with $18,250 cash in the business, and $17,640 in the bank statement at the end of the month.

After studying both of these records, the accountant finds the following:

• Outstanding cheques: $900

• Deposit in transit: $1,450

• A bank service charge for this deposit, that has not yet been recorded, is $60.

• Interest the bank credits: $100

After these adjustments the amount of cash book and bank balance are equal.

The following example demonstrates that a balance does not necessarily mean that an error has been made. They may also show out-of-sync time or transactions which have not been entered by either party.

Bank Reconciliation Statement Format

While there may be variations in format from organisation to organisation, most bank reconciliation statements include the following components.

Typically the document starts with the "balance on bank statement," amount. Items are then added or deducted from the bank balance to give the adjusted bank balance.

The cash book balance of the company is given separately followed by adjustments for the transactions which are not recorded internally. Once these adjustments are made, it should be noticed the balances will be equal.

The clear and consistent format allows for the reconciliation to be reviewed easily, as well as future audits.

Bank Reconciliation Process

The process of reconciliation is normally done in an orderly fashion.

First, get a bank statement and the cash register record of the company for the same period.

Then, double-check the following each and every deposit, payment, transfer and other transaction made by both parties. Items which are not matched should be investigated.

Once they have determined the best deposits, unpresented cheques, bank charges or interest income from it, or if they have made an error in recording, adjustments are made to the company's accounting records.

Lastly, make sure that the adjusted cash book balance equals the adjusted bank balance. If there are still differences to be explained, further review is needed until all differences are explained.

This exercise will allow for up-to-date financial information to be maintained throughout the year.

Use Bank Reconciliation Statement Template to compare your bank statements with your company's accountings.

Typically, a reconciliation template will have the following sections:

Bank Reconciliation Statement Template

The remaining balance of your bank statement.The end of the bank statement balance.

• Additions: Deposits in transit

• Less: Outstanding cheques

• Adjusted bank balance

• Balance of the cash book.

• Make accounting adjustments (add or subtract)

• Balanced cash book, recording the transactions

• The result of comparing the two adjusted balances.A statement of equality of the two adjusted balances.

Reconciliating monthly using the same template will provide consistency, reduce the chances of omissions and will make it easier for the accountant or auditor to reconcile.

Conclusion

A bank reconciliation statement is an important internal control that helps businesses verify the accuracy of their cash records. By comparing accounting records with bank statements, organisations can identify timing differences, correct recording errors, and detect unusual transactions before they become larger problems. Whether preparing monthly financial reports or supporting an annual audit, regular bank reconciliation improves the reliability of financial information and provides greater confidence in one of the company's most important assets—its cash.