Today, you’ll learn bank reconciliation components.
Read on.
Written By Kevin Mil - Author/Founder
What are the major parts of bank reconciliation?
If you want to prepare a bank reconciliation statement, it’s essential to understand the key components involved.
The bank reconciliation process consists of several major elements, each with their own sub-components that play a crucial role.
In this post, we will dive into these primary components, listing them out along with their respective sub-components.
By familiarizing yourself with this breakdown, you’ll gain a clearer picture of what goes into creating an accurate and thorough bank reconciliation statement.
The following components are essential for a thorough bank reconciliation:
1. Bank Statement Balance and Book Balance
| Component | Definition | Source |
|---|---|---|
| Bank Statement Balance | The ending balance shown on the bank statement | Bank |
| Book Balance | The balance in the company’s cash account | Company’s accounting records |
These two balances are the starting point for any bank reconciliation.
Discrepancies between them necessitate further investigation and adjustments.
2. Reconciling Items
- Deposits in Transit
- Outstanding Checks
- Checks issued by the company but not yet cleared by the bank
- Subtracted from the bank statement balance during reconciliation
- Bank Fees and Charges
- Service charges, overdraft fees, or wire transfer fees
- Usually deducted by the bank but not yet recorded in the company’s books
- Subtracted from the book balance during reconciliation
- Interest Earned
- Interest income on the account balance
- Added to the book balance during reconciliation
- Errors and Discrepancies
- Can occur in either the bank’s records or the company’s books
- Examples include transposition errors, omitted transactions, or incorrect amounts
- Corrected during the reconciliation process
3. Adjustments and Journal Entries
After identifying all reconciling items, accountants make necessary adjustments to the book balance.
This typically involves creating journal entries to record:
- Bank fees and charges
- Interest income
- Any errors found in the company’s records
The goal is to align the adjusted book balance with the bank statement balance, ensuring accurate financial reporting.
4. NSF Checks
Non-sufficient funds (NSF) checks are another important component to consider.
These are checks that have been returned by the bank due to insufficient funds in the issuer’s account.
They need to be accounted for in the reconciliation process and may require follow-up action.
NSF checks are already recorded as deductions from receivables or income in the books when the checks were initially received.
However, because there are insufficient funds to cover these checks, as an accountant, you must take corrective action.
To accurately reflect the true cash balance, you need to reverse your previous journal entry that recorded the NSF check.
This reversal entry will adjust the cash balance and ensure the books are not overstated.
5. Adjusted book and bank balances
The adjusted book and bank balances represent the correct or ideal balances of the Cash in Bank account you are reconciling.
After adjusting all your book reconciling items, your Cash in Bank balance in the book should equal the adjusted book balance.
However, if you have not adjusted the reconciling items, then your Cash in Bank account balance will not match the adjusted book balance.
It is essential to ensure that all necessary adjustments are made during the reconciliation process to maintain accurate financial records and identify any discrepancies between the book and bank balances.
The adjusted book and bank balances should be equal for your bank reconciliation to be correct.
If they are not balanced, then your bank reconciliation is still incomplete.
To ensure accuracy, carefully review all adjustments made to both the book and bank balances, making sure that each adjustment is properly recorded and accounted for.
Once all necessary adjustments have been made and the balances match, your bank reconciliation can be considered complete and accurate.