Bank Reconciliation Statement

A company’s bank reconciliation statement (BRS) compares the transactions recorded in its general ledger to those listed on its bank statement.

This process ensures that the company’s records match the bank’s records, preventing errors and discrepancies from occurring.

What is the Explanation of Bank Reconciliation Statement?

A bank reconciliation statement consists of several key components that are important to understand.

To fully grasp how a bank reconciliation statement works, it’s essential to be familiar with each line item found within the statement.

By breaking down the individual elements, you’ll gain a clear understanding of what the bank reconciliation statement is communicating.

This knowledge will help you effectively utilize and interpret the information provided in the statement.

A bank reconciliation statement consists of two sections: the book section and the bank section.

The book section comes from the depositor’s records, while the bank section comes from the bank’s records.

The bank provides their records in a statement for the month following the one being reconciled.

This bank statement is the source of information used in the bank section of the reconciliation.

Book Section

Unadjusted Book Balance

The unadjusted book balance represents the depositor’s cash book ending balance for the month being reconciled.

This balance remains unadjusted due to potential unrecorded transactions the accounting office may have not yet documented or uncorrected errors that still need to be addressed.

The term “unadjusted book balance” reflects the fact that adjustments maybe necessary to align the depositor’s records with the accounting office’s records and to rectify any discrepancies or omissions.

Book Reconciling Items

A bank reconciliation statement with reconciling items indicates there are unrecorded transactions or uncorrected errors that still need to be addressed through journal entries.

Unrecorded transactions commonly include things like cash deposits, fund transfers, and other financial activities.

Recording errors by the accounting department are the most frequent cause of mistakes.

Once these reconciling items are identified during the bank reconciliation process, the accounting team typically clears them the following month by preparing the necessary accounting entries.

Adjusted Book Balance

The adjusted book balance is calculated by adding or deducting book reconciling items to the unadjusted book balance, depending on the underlying reasons.

Unrecorded check issuances, for instance, are deducted from the unadjusted book balance.

On the other hand, unrecorded interest income is added to the unadjusted book balance.

These adjustments ultimately determine the final adjusted book balance.

Bank Section

Unadjusted Bank Balance

The unadjusted bank balance comes from the bank statement for the month you’re reconciling.

Keep in mind that the ending balance on the bank statement may require adjustments if any reconciling items are identified during the reconciliation process.

That’s why we still refer to it as the “unadjusted” bank balance at this stage.

Bank Reconciling Items

Some transactions may not be recorded by the bank due to timing differences (reconciling items).

One example is when checks issued by the depositor have not yet been presented to the bank for payment by the payees.

Another situation arises when deposits are made after the bank’s cutoff hour, especially on the last day of the month.

In these cases, the money has been deposited but not yet recorded by the bank.

Adjusted Bank Balance

To calculate the adjusted bank balance, we add deposits in transit and deduct outstanding checks from the unadjusted bank balance.

Deposits in transit are reconciling items that the depositor has already deposited but the bank has not yet recorded.

These are typical examples of bank reconciling items.

We also deduct outstanding checks because they are checks issued to payees that have not yet been presented to the bank.

Bank errors are another reconciling item that we add or deduct from the unadjusted bank balance to calculate the adjusted bank balance.

Banks can also make errors, and you should inform them if you find any during the bank reconciliation process.

How to Interpret?

In a bank reconciliation statement, it’s normal to have reconciling items, especially in the book section.

Unrecorded transactions like interest income and deposits are common.

However, pay close attention to unrecorded disbursements, which can include checks and fund transfers, as they might be unauthorized.

If the disbursements are authorized, there’s no issue, but unauthorized transactions indicate a problem.

Additionally, review any long outstanding reconciling items that remain unresolved for more than one to two months.

Question why these items are taking so long to resolve.

It’s normal to have reconciling items in the bank section, such as outstanding checks and deposits in transit.

Pay attention to any long outstanding deposits in transit and investigate why they haven’t cleared at the bank.

Similarly, monitor the age of outstanding checks and determine why they remain uncashed.

Consider creating a policy to resolve long outstanding deposits in transit and outstanding checks that have been pending for several months.

Keeping a close eye on these reconciling items will help maintain accurate financial records and ensure all transactions are properly accounted for in a timely manner.

The adjusted book and bank balances should match, as they reflect the depositor’s available cash in the bank account.

Ideally, this balance mirrors the cash recorded in the depositor’s bank ledger.

However, differences can arise if reconciling items haven’t been recorded yet.

Who prepares bank reconciliation?

Bookkeepers typically handle bank reconciliation as part of their responsibilities, which includes ensuring all company financial transactions are accurately recorded.

However, other employees may also be assigned this task.

If an accountant is working alone or without a bookkeeper or assistant, they can perform the bank reconciliation themselves.

To maintain strong internal controls, someone other than the bookkeeper should approve the bank reconciliation.

If the bookkeeper both prepares and approves it, the segregation of duties—a key aspect of internal control—is compromised.

Additionally, the person approving, such as an accountant, should thoroughly review the bank reconciliation report before giving their approval.

Internal and external auditors often perform bank reconciliations also, as they are responsible for reviewing these reports.

If they identify errors during their review, they may redo the reconciliation.

Detail-oriented auditors typically prepare their own bank reconciliation and compare it to the one done by the bookkeeper.

What is reconciling a bank statement used for?

Reconciling your bank statement is crucial to ensure accuracy and detect financial errors.

By regularly comparing your statement with your own financial records, you can identify discrepancies, resolve differences, and correct errors or omissions.

This process involves matching dates, amounts, and fees, and verifying the account balance.

Regular reconciliation also helps you prevent errors, maintain financial control, and prevent identity theft by detecting suspicious activity on your account.

How often would a good bookkeeper complete a bank reconciliation?

A good bookkeeper typically handles monthly bank reconciliations to prevent a buildup of unreconciled transactions between the company’s records and the bank statement.

Ideally, if daily bank data is available, reconciliation should be done daily