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Bank Reconciliation Statement

 

One of the most important tasks in the monthly Accounting cycle is to prepare a Bank Reconciliation Statement.

The purpose of the preparing a Bank Reconciliation Statement is:

(a)

To ensure that all transactions that effect your bank account have been properly recorded in your accounting system.

For example, it would be possible that you may write out a cheque but forget to record it in your accounting system (i.e. the cash payments journal). A failure to record transactions affecting your bank account would result in you not knowing how much funds you had available.
(b)

To check that your Bank has not made mistakes.

In fact Banks do make mistakes. Generally if the mistake is in your favour, you say nothing but if the mistake takes money away from you, then you complain to the bank!

In one famous case, a Bank accidentally deposited $50 million in a private bank account. The Bank discovered its error after one week and took the money bank. However, the Bank failed to recover the $58,000 interest the account owner earned. Wouldn't it be nice!

Essentially, the Bank Reconciliation statement tests the difference between the Bank Balance on your bank statement and the Bank Balance in your Accounting Systems. There will almost always be a difference.

What does a Bank Reconciliation Statement look like?

The illustration below shows a bank reconciliation statement as having two sections.

Section A is where you calculate what your bank account balance from your own financial database.

Section B is where you list the differences between the transactions appearing on your bank statement and the transactions appearing on your cash journals.

How do you get started?

First work out Section A. This is where you will work out your Bank Balance at the end of the month. The computation is simple.

Add the receipts for the month to the Bank Balance at the beginning of the month. Then take away the payments. This will give you the Bank Balance at the end of the month.

Then work out Section B. You should neatly tick every transaction that appears in both places (the Bank Statement and the Cash Journals). Then what is left should explain the difference between what you say is in your bank account and what the banks says.

The task of preparing a bank reconciliation statement is all about comparing the transactions on your cash payments journal and cash receipts journal with the transactions that appear on the Bank Statement. If you find any differences they must go in Section B.

There is an exercise on Bank Reconciliation which you can try.

Click here for Exercise 14 - Bank Reconciliation