10 Bank Reconciliation Rules

Today, you will learn about bank reconciliation rules.

These 10 bank reconciliation rules enable fast and efficient preparation of reconciliation reports. The preparation of a reconciliation report should follow certain rules to expedite it. However, the rules in this post do not cover all guidelines.

Part of its preparation is to have a bank statement ready since the reconciliation of bank transactions cannot be started without it. In addition, bank balances do not cover all transactions in a depositor’s record.

For example, not all check issuances have been cleared in a bank.
Hence, a bank statement balance may be higher than a cash book balance of a depositor.

Also, check deposits may already be recorded in a cash book but not yet cleared in a bank. A clearing process may have a minimum of three days. However, for regional check deposits, clearings may take over five days.

The bank reconciliation statement rules below are general rules for preparing for bank reconciliation, and it is believed that they can support a bank reconciliation officer in the bank reconciliation process.

The rules of bank reconciliation statement are:

1. Reconcile all bank account(s) monthly

A financial transaction may be recorded in an entity’s cash book but not cleared in a bank. This is the reason for the accounting requirement to prepare a bank reconciliation report. The requirement ensures that all cash balances are sufficiently substantiated.

A depositor’s cash balance is usually not equal to a bank balance because of timing differences. For example, deposits in transits, outstanding checks, and recording errors.

2. Reconcile deposits first

In a bank reconciliation, the most laborious aspect of the reconciliation process is matching all deposits with the bank statement. For example, a bank statement does not have any common references to a depositor’s deposit record. Hence, the reconciliation is not automatic.

Because the reconciliation is not automatic, there are excel functions that can assist the reconciler. Some examples are usually the SUMIF, VLOOKUP, and COUNTIF functions. These functions are used to match data between a depositor’s record and a bank statement.

After reconciliation, all-cash book debits are added to the beginning cash balance, and all bank statement credits are added to the beginning bank balance. Then, all reconciling items are also recognized in the bank reconciliation statement to see if the reconciliation is correct.

If the total amounts of both cash and book balance are not equal, then redoing the reconciliation may be necessary.

3. Identify unrecorded deposits

Unrecorded deposits can be collections deposited to a bank but not recorded in the depositor’s cash book. They can also be deposits from customers without communicating with the entity.

Similarly, unrecorded deposits are perhaps used to offset unrecorded disbursements to hide the fact. It is also known that offsetting can arise if an entity’s internal control is weak.

4. Outstanding Deposits should not be carried forward to an ensuing bank reconciliation statement

Outstanding deposits still uncleared are prospects for adjustments through journal entries. In addition, if they are already over a month, it could be a sign of errors or loss of revenues.

Loss of revenues occurs when customers’ deposits have not cleared in the bank. Also, when deposits to the bank were not really made.

It can be a sign of internal control problems and collections, and deposits must be reviewed.

5. Prepare the adjusting entries for erroneous deposits in transit

After preparing a bank reconciliation statement, sometimes there are accounting errors found in the recording of deposits. For example, a deposit is recorded in another bank account. Hence, the erroneous financial transaction becomes part of the deposits in transit at the end of the month.

The total amount of deposits in transit appears overstated and must be corrected with a journal entry.

Similarly, undeposited collections may also overstate deposits in transit. Although deposits are already recorded in a depositor’s record, some are not really deposited in a bank because of fraud. Here, further investigation must be made to identify internal control weaknesses.

6. Reconcile disbursements after deposit reconciliation

In a bank reconciliation, reconciling disbursements is simpler than reconciling deposits. First, a bank statement shows the check numbers of bank debits. Next, check numbers are matched faster with the SUMIF function in an excel or google sheet app. Finally, the unmatched disbursements are obviously the reconciling items.

To increase further the efficiency in preparing a bank reconciliation statement and to strengthen internal control, all entity disbursements should be done through checks.

However, some payments need to be made online or through fund transfers. For example, payments on payroll and taxes.

Hence, reconciliation of disbursements is usually prepared after the reconciliation of deposits.

After reconciliation of disbursements, all-cash book credits are deducted from a cash balance (Beginning cash balance + book debits) to calculate the unadjusted book balance.

Then, all bank debits are deducted from a bank balance (Beginning bank balance + book credits) to calculate the unadjusted bank balance.

Finally, the reconciling items are reflected in a bank reconciliation statement to calculate the final adjusted book and bank balance.

In the above method that is described, the bank reconciliation process starts from the beginning balances of both records instead of the unadjusted balances. This method is more mechanical, which speeds up the reconciliation process.

7. Identify unrecorded disbursements

Financial statements are unreliable when there are significant unrecorded financial disbursements. It means that unauthorized transactions may have been made.

Authorized disbursements usually affect the profitability of an entity, especially with the non-preparation of bank reconciliation statements. They are probably hidden through non-recording of deposits to suppress the fraud.

Hence, the identification of unrecorded deposits and disbursements is necessary to strengthen an internal control of a business.

8. Correct all errors immediately

All errors must be corrected immediately to avoid the accumulation of significant amounts, which can affect the reliability of financial reports.

9. Do not allow only one person to prepare all bank reconciliation statements

Segregation of duties is still also applicable in preparing bank reconciliation statements to avoid report manipulation. This principle is also a requirement for strong internal control.

If only one person prepares 30 bank reconciliation reports, that person has an opportunity to adjust the reports.

A strong internal control must eliminate the aptness to commit deceit.

10. Have someone higher in rank review reports

All bank reconciliation reports must be reviewed thoroughly before they are accepted. As a result, a reliable financial report can be produced efficiently and reliably.