Bank Reconciliation

Terminological definition:

1. Bank statement: is a list of all of the cash receipts and withdrawals that a business thinks
it has made over a period of time, and it’s managed as you would expect by the Bank
2. Cash Book: is an accounting record of what a business thinks it has in the bank along
with all the cash inflows (debits) and cash outflows (credits). It’s managed by the Business itself,
usually by an Accountant or Bookkeeper.
In the ideal world, the closing balances of both Bank Statements and Cash Books should be
equally exactly.
3. NSF check (relates to Bounce Check item) – NST stands for “Not Sufficient Funds”.
These are checks that customers have mailed to us, and that we’ve deposited in the bank only to
find that these have been rejected because the customers haven’t had sufficient funds to honor
the checks.

There are three ways that the differences between Bank Statements and Cash Books can come:

(1) Omission

Omissions relate to transactions that appear on the Bank Statement but haven't been yet
recorded by the Business in the Cash Book due to – Missing Receipts, Interest Received, Bank
fees, and Bounced cheques (checks).

The business may not know the existence of these amounts until they receive the Bank
Statement at the end of the month.

(2) Timing Differences

These are transactions that are recorded in the Bank Statement and the Cash Book in
different periods. The two most common Timing Differences are

 Deposits in Transit (Unrecorded Deposit) – relates to cash that a business receives

and records in its Cash Book during one period but that doesn’t appear in its Bank
Statement until the following period.
 Typically, these are checks of electronic fund transfers that the business receives
from customers towards the end of the month that the bank does not process
immediately.
 Outstanding Cheques (Checks) – is a check that the business sends to a supplier in
one month that might just sit on their desk for a while and not actually get cashed
in until the following month.
(3) Errors

Sometimes, the error happens (which relates to the Business’s calculation or incorrect record)
either in the Bank Statement or in the Cash Book. However, it mostly happens in the Cash Book.

The purpose of Bank Reconciliation is for identifying every single one of the items above to
ensure bring the Cash Book is up-to-date and the closing balance of the Cash Book is equal to
the Bank Statement, and vice versa.

Bank Reconciliation is essential because it helps the Cash Book always be up-to-date and
gives an accurate view of business status, and it also allows businesses to calculate the true cash
balance of the business.

7 easy steps for the Bank Reconciliation process:

Step 1: Get copies of the Bank Statement and Cash Book for the period want to reconcile

Step 2: Set up the Bank Reconciliation templates

Step 3: Tick all matching transactions in both Bank Statements and Cash Book

Step 4: Calculate the Adjusted Bank Statement balance

Step 5: Calculate the Adjusted Cash Book balance

Step 6: Check that both Adjusted closing balance totals are match

Step 7: Prepare the necessary Journal Entries