To grasp the concept of a bank reconciliation, it’s essential to understand its underlying structure.
This structure mirrors the relationship between a company’s accounting records (book) and its bank statements.
Specifically, both start with an unadjusted balance and progress to an adjusted balance.
For this explanation, we’ll focus on the adjusted balance method of bank reconciliation, as it provides an accurate representation of the bank balance.
We won’t cover the book-to-bank or bank-to-book methods, as they don’t accurately reflect the deposit holder’s actual bank balance.
Written By Kevin Mil - Author/Founder
A bank reconciliation consists of three key components: the unadjusted book and bank balances, reconciling items, and the adjusted book and bank balances.
To create an accurate bank reconciliation report, it’s essential to grasp these components.
Let’s break each down further to ensure a thorough understanding.
Unadjusted Book Balance and Bank Balance – First Part
The unadjusted book and bank balances ( Part of the structure) represent the ending balances of the records being reconciled – the balance shown in the depositors’ cash book and the balance shown on the bank statement.
Ideally, these balances should match exactly, but due to timing differences and errors, this is rarely the case in a company with numerous bank transactions.
When the two balances don’t match, it’s essential to identify the reconciling items that are causing the discrepancy.
Once these items are identified, they should be included in the current month’s bank reconciliation, rather than showing the difference as an outstanding issue.
A bank reconciliation involves reviewing and identifying discrepancies between the two balances – typically the company’s accounting records and its bank statements.
To do this, you need to determine what specific transactions are causing the discrepancy.
For instance, if there’s a $1 million difference between the unadjusted book balance and the bank balance, this discrepancy should be highlighted in the bank reconciliation report as a reconciling item.
Reconciling Items -Second Part
The reconciling section of the bank reconciliation structure is where you list the causes of discrepancy between the unadjusted book balance and bank balance.
In this section, you would highlight the reasons for the discrepancy, such as book errors, unrecorded transactions, outstanding checks, deposits in transit, and others.
For example, if the unadjusted book and bank balances differ by $1 million, this section would include explanations for the discrepancy.
Reconciling items should be grouped correctly in the reconciling section.
Deposits in transit and outstanding checks, for instance, are typically added to and deducted from the unadjusted balance, respectively, since they have already been recorded in the depositors’ book.
Other reconciling items may include unrecorded bank receipts, interest income, unrecorded disbursements (such as bank charges and unrecorded check issuances), and errors in recording.
Adjusted Book Balance and Bank Balance – Final Part
The final section of the bank reconciliation structure is the adjusted book and bank balance.
Once you’ve presented the reconciling items in the reconciling section, these two balances should be equal.
The adjusted balances accurately reflect the actual bank balance available for the depositor’s business operations.
Conversely, if the unadjusted book and bank balances remain unequal after the reconciliation process, it indicates that the bank reconciliation is incomplete or requires further review and revision.
If the adjusted book and adjusted bank balances don’t match, it’s essential to review and revise the bank reconciliation statement.
This is because there may be reconciling items that haven’t been identified yet.
For example, bank credits in the bank statement may not have been recorded in the depositor’s records, or unrecorded transactions may still be outstanding.
Additionally, duplicate recordings of bank transactions can also cause discrepancies, such as when an issuance of a check is recorded three times by the depositor’s accountant – in this case, the two additional records must be included in the reconciling items.
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