Bank Reconciliation Procedure

The bank and the depositor generally maintain separate records of the depositor’s checking account. Bank reconciliation is an analysis of the items and amounts which resulted in the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. The adjusted cash balance determined in the bank reconciliation that is reported on the balance sheet.

Bank Reconciliation Procedure:

Bank reconciliation is generally divided into two categories which are described below:

  • 1. The bank section basically starts with cash balance according to the statement of bank and ends with the adjusted balance.
  • 2. The company section starts with the cash balance regarding the company’s records and finishes with the adjusted balance.

The bank reconciliation procedures should be prepared by that employee who has no other responsibilities pertaining to cash. A company should follow this internal control principle of independent internal verification, as cash embezzlement may go overlooked. For example, a cashier who prepares the reconciliation can misuse cash and hide the embezzlement by misstating the reconciliation. Therefore, the bank accounts should be reconciled, and the embezzlement would not be detected.

The both adjusted balances in the bank and company sections of the reconciliation must be the same. If the adjusted balances are not equal, then it refer that an item has been ignored and that item must be found. The adjusted balances also could not be equal for another reason such as an error has been made by either the company or the bank. In these cases, the error is often revealed by comparing the amount of each item of deposit and check on the bank statement with that in the company’s records. The errors which are discovered by bank or company should be added or deducted from the bank or company section of the reconciliation according to the nature of the error. For example, the bank wrongly recorded a company check for $45 as $350

There are some steps in the bank reconciliation which will reveal all the reconciling items that cause the difference between the two balances.

Deposits in transit: the individual deposits are generally listed on the bank statement. These individual deposits should compare with those deposits which are in transit from the preceding bank reconciliation and also with the deposits per company records or duplicate deposit slips. Those deposits are recorded by the depositors which are not recorded by the bank as the deposits in transit. Then these deposits should be added to the balance per bank.

Outstanding checks: Evaluate the paid checks which are shown on the bank statement with checks that are outstanding from the previous bank reconciliation, and also with the checks issued by the company as recorded in the cash payments journal. Issued checks recorded by the company but that have not yet been paid by the bank are outstanding checks. Then remove the outstanding checks from the balance per the bank.

Errors: The errors which are discovered by bank or company should be added or deducted from the bank or company section of the reconciliation according to the nature of the error. For example, the bank wrongly recorded a company check for $45 as $350. This bank error of $305 would be added to the bank balance in the bank section of the reconciliation. In addition, the bank should be aware of the error so that it could be corrected timely. Alternatively assume that the company recorded a deposit of $1,000 as $2,000. This company error of $1000 ($2,000 _ $1,000) would be deducted from the cash balance in the company section of the bank reconciliation. By using a journal entry the company will later correct the error. All errors are made by the depositor are reconciling items in determining the adjusted cash balance per books. Reversely, all errors made by the bank are reconciling items in determining the adjusted cash balance per the bank.

Bank memorandum: mark out bank memorandum to the depositor’s records if there any unrecorded memorandum list it in the appropriate section of the reconciliation schedule. For example, any company may subtract from the balance per books a $9 debit memorandum for bank service charges. Similarly, it also may add to the balance per books $21 of interest earned.