4 Reasons a Bank Reconciliation Should Match a Balance Sheet

Today, you’ll learn should a bank reconciliation matches a balance sheet.

Most users of a bank reconciliation statement do not understand its purpose. For instance, in a meeting, the board of directors rarely requires all bank reconciliation statements to verify the cash balance on a balance sheet. It is not their job to verify the financial statement, though. They usually employ an auditor to make the confirmation of the cash balance. Also, some of them have not even seen a bank reconciliation report, since it is not their job. However, they can educate themselves by reading the reasons below. It can help them assess the work of an auditor. Did they hire a reliable accountant to handle the bank reconciliation statements?

In the real world, the adjusted book balance in a bank reconciliation statement does not match the cash balance on the balance sheet. For instance, the accounting has not yet recorded the reconciling items in the books of accounts. Lack of personnel could be the reason. Deadlines of report submission could be not practical. Also, the reconciling items have not been identified. Some deposits are still unknown although already been communicated to the bank. Furthermore, delays in the preparation of bank reconciliation reports could be grounds for the non-correction of reconciling items. The reasons are endless, but the end goal should be to prepare a bank reconciliation statement for each bank account of an entity.

The list below shows the four (4) reasons that a bank reconciliation should balance a balance sheet. In fact, they are the grounds for why auditors require the submission of the report. Ideally, there should be no difference, but it does not happen all the time in an accounting office.

1. The adjusted book balance is the correct cash balance

The correct cash balance is calculated with the adjusted balance method of bank reconciliation. Furthermore, the adjusted method is mostly used by companies and the government. It is most common because the other two methods are bank-to-book and book-to-bank methods. The other methods do not determine the actual cash balance of a bank account. They account for all transactions and add or deduct the reconciling items to prove both balances. Generally, the correct cash balance should match the cash balance on the balance sheet. It is normal to make adjusting entries to match the correct balance to the balance sheet. Also, the correct cash balance is derived by comparing the transactions between a depositor’s book and a bank statement. All unmatched or uncleared transaction remains in the reconciling items of the bank recon report.

2. It means there are unadjusted reconciling items when bank reconciliation does not match the balance sheet.

Generally, the total adjusted balances of all bank reconciliation statements should equal the cash balance of a balance sheet. Indeed, all reconciling items should have been corrected in the depositor’s book. It means that all adjusting entries are already made in the accounting record. Also, bank errors are already recognized in the records of both the depositor and the bank. Examples of bank errors are double posting of checks in the bank statements and bank charges that do not belong to the company. Notably, differences are already accounted for and eliminated. The discrepancies are already recorded in the depositor’s record, which accounted for all the unrecorded transactions and errors.

3. A vast difference could mean material errors in recording

The difference between the adjusted book balance and the balance should not materially misstate the cash amount on the balance sheet. For instance, a five (5) percent difference is usually significant. Most auditors use the rate to consider the total amount as earthshaking. Corrections should be done immediately. Furthermore, a substantial margin could overstate or understate the balance. A $1,000,000.00 difference is huge even though the amount did not equal or exceed the above rate. Also, a huge variance is a sign of major recording errors in the cash books. The errors should be accounted for and adjusted as soon as possible to straighten the mistakes.

The reviewer should understand the difference and evaluate whether the amount affects the balance sheet’s cash balance amount. For example, determine if the discrepancy is huge. A bigger difference means there are significant reconciling items that need to be recognized in the depositor’s records. Next, decide when to adjust the cash book of the depositor. The adjustments should be made as soon as possible to correct the errors and record the unrecorded financial transactions.

4. A bank reconciliation statement is the substantiation of the cash balance on the balance sheet

The purpose of a bank reconciliation report is to give proof of the cash balance on a balance sheet. In this case, the total amount of reports should tally with the cash balance of the balance sheet. Ideally, there should be no difference. Discrepancies should be evaluated by their materiality. However, it is not usually true in the real world because of uncontrollable situations. There could be unresolved deposits left unadjusted because of unidentified depositors.

A bank reconciliation statement validates the transactions recorded in the depositor’s book. In addition, the report is required to show documentation of cleared cash transactions in a bank such as unrecorded transactions, errors in recording, and bank errors. The most common unrecorded transactions are unidentified deposits. The less common unreported dealings are unauthorized disbursement when internal control is strong. Also, the validation begins with a review of deposits and disbursements. It usually starts with identifying deposits in transits that are over two to three banking days. The reasons for the delays are evaluated to strengthen controls. Are there errors in the recording? Are there delays in deposits?