The Bank Reconciliation Statement

The Bank Reconciliation Statement

A bank reconciliation statement is a statement that makes a company's records of its bank account consist with the bank statement or bank records and make corrections if required. Such statement compares the two accounts; the closing bank balance on the bank statement and the closing bank balance on the company's books of accounts in order to validate the accuracy of its business transaction. It summarizes different business activities that are related to the bank such as deposits, withdrawals, payments, and other activities that affect the balance in the bank account.

It is considered a useful internal control financial tool that can help to detect cash manipulations and fraudulent transactions. Management prepares bank reconciliation statements on a monthly basis to ensure the accuracy of business transactions. In IFRS and GAAP standards, there is no specific time limit mentioned for preparing a bank reconciliation statement. The bank reconciliation statement could be prepared on a daily basis or monthly basis based on the size of per-day business transactions.

Adjustments in Reconciliation Statement

It is very unlikely that both ending balances (the one from the bank and the one from the company) will be identical. There are several reasons for the differences in balances such as bank service fees, deposits in transit, multiple payments, not sufficient funds, error in recordings and uncleared cheques. The major reasons for creating the bank reconciliation statement are listed below with a short explanation:

1. Deposit in Transit
   Deposit in transit is the term used when a depositor record about a cash received transaction is stored in the business' record book but the depositor's cash or cheques reaches the bank too late to be entered in the records of the bank.
   • Example: On 31 March 2021, you received a cheque of €500 from Mr. Z (the debtor) and record it in the company's books of accounts. The cheque reaches the bank too late to be recorded in the bank statement for the same month and is recorded on the 1st of April 2021.
   • Adjustment: Thus, the business transaction should be added in the March 2021 bank statement balance.
2. Outstanding or Unpresented Cheques
   When the company issues cheque to its creditor for payment and the creditor did not present the cheque for payment in the same issued month, these types of cheques are known as unpresented or outstanding cheques.
   
   • Example: On 31 March 2021, you issue a cheque of €750 to Mr. A (the creditor) and record it in the company's books of accounts. Before the end of March, the creditor did not deposit the cheque in the bank. Here, your bank statement balance will not present the entry of that cheque and create a difference of €750.
   • Adjustment: Thus, the outstanding cheques should be deducted from the bank statement balance.
3. NSF (Not-Sufficient Fund)
   NSF cheques are the cheques that are not honored by the bank because of not having a sufficient fund in the account of issuing entity. The cheque is returned as NSF to the depositor.
   • Example: You received a cheque of €450 from Mr. Y and record it in the company's books of accounts. When you deposit the cheque in the bank, the account is credited by €450. After that, the cheque is dishonored by the creditor's bank account because of not having a sufficient fund in the account. So, as a result, your account will be reduced by €450.
   • Adjustment: Thus, the NSF cheques should be deducted from the company's books of account.
4. Bank Charges
   For providing services to its customers, banks charge service fees and deduct it from their accounts. Such deductions are usually made at the end month and customers are unaware of them. Thus, these charges are adjusted in the company's books of account.
5. Bank Credits
   On some accounts, banks pay interest for the benefit of the company. Such interest payments are usually made at the end month and depositors are unaware of them. Thus, these charges should be adjusted in the company's books of account.
6. Bank Errors
   Bank errors are errors made when taking or depositing money out from the account because of minor differences in the names of accounts or entering incorrect amounts. Company officials may also make errors such as recording an incorrect amount. For example, a cheque of €450 may be recorded as €540 in the company's books of accounts.

Format of a Bank Reconciliation Statement. Example

Sources
Book: Principles of Accounting Volume 1 - Financial Accounting (2019) by Mitchell Franklin, Patty Graybeal, and Dixon Cooper,
Book: Accounting-Bank Reconciliation (2008) By Mabel Lage.