The Complete Guide to Use a Bank Reconciliation


This is a complete guide on how to use a bank reconciliation statement.

Non-accountants and non-bookkeepers usually do not use bank reconciliation statements fully. For instance, they might have no grasp of its purpose that they ignore the report when they receive it. Also, they would just ignore the reconciliation report because they entrust all accounting matters to their employees. In addition, they do not generally refer to the bank reconciliation statement when planning. Hence, they will not appreciate the report unless they know the benefits.

This tutorial will guide anyone on the seven (7) usage of a bank reconciliation statement. For instance, a manager can use number four (4) below to measure the availability of cash at the beginning of the month. The calculation of the adjusted Cash in the Bank balance will help. Also, the management could discover undeposited collections by using number five (5) below. The Statement of Performance (Income Statement) could report huge profits but are they actually collected and deposited to the bank.  In addition, there are more ways to use a bank reconciliation statement. The other five ways are utilized by other end-users. Hence, a bank reconciliation statement is useful for all types of end-users.

1. Use the bank reconciliation as the basis for the recording of unrecorded deposits

Unrecorded deposits are discovered when a bank reconciliation is prepared. For instance, a customer transfers cash to the entity’s bank account without notification. Most clients would assume that their payments are automatically recognized by an entity. Also, interest income will usually be recorded after the reconciliation of the cash book and bank statement. Most banks will credit the account of the depositor quarterly for interest. In addition, unidentified deposits are discovered after the preparation of the reconciliation reports. Those deposits are then recorded to accounts payable instead of revenue unless identified. Thus, a bank reconciliation statement is useful for uncovering unrecorded deposits.

2.Bank reconciliation lists all stale checks for adjustments

All uncleared outstanding checks that are six months old are already stale. For instance, payees had not deposited the checks. There could be different reasons which can be the cost and benefits of depositing a check. Reasons could be that there are errors in the check and the payee did not bother to notify the check drawer. Also, the checks were lost by the drawees and they just forgot about them. It could happen when the check recipients do not care about money. Further, the reasons the checks become stale are unknown. Sometimes the reasons could not be determined due to not enough information. Thus, the list of outstanding checks is used to adjust the cash books to increase the Cash in Bank Account and the Accounts Payable account.

Note: The bank reconciliation statement is also used to notify payees about their undeposited checks before they become stale.

3.Implement all adjusting entries of accounting errors utilizing the bank reconciliation statement

A bank reconciliation statement also includes errors discovered during the reconciliation of both cash book and bank statement for accounting adjustments. For instance, check releases that are recorded in another bank account are shown on the reconciliation report. It is unavoidable which could be due to the enormous number of financial transactions being processed daily by accounting. Also, erroneous amounts in the recording of financial transactions are also presented in the report. The amounts of collections, deposits, and disbursements could be inadvertently recorded with incorrect amounts. In addition, the reconciliation statement will be an attachment to the adjusting entries to correct the discrepancies. All adjusting entries should have supporting documents. Thus, when correcting accounting entries in the cash book, the bank reconciliation statements will serve as the supporting documents.

4.Calculate the actual funds in a bank

The adjusted method of bank reconciliation statement calculates the actual cash balance of an entity at the end of the month. Indeed, sometimes, the Cash in the Bank balance shown on the balance sheet will not coincide with the actual available funds for payments to salaries, suppliers, contractors, and others. In addition, all reconciling items are considered to have an accurate calculation of the Cash in the bank balance available for disbursements. Some examples of reconciling items could be unrecorded deposits and disbursements. Thus, at the end of the month, the adjusted method of bank reconciliation statement will compute the correct cash balance.

5.Detect delayed deposits of collections

Delayed deposits are likewise shown in a bank reconciliation. Indeed, deposits that are still in transit for over two business days are unusual. A policy would likely require the custodian to send immediately all collections for the day to the bank. In addition, deposits should be made within the day of collections or on the next banking day. It is usually part of the internal control of an organization. Furthermore, a bank reconciliation includes the list of deposits in transit, including dates. Monitoring the dates could reveal the above-mentioned deficiencies. Hence, a bank reconciliation statement could be used to detect delays in deposits.

6.Calculate the available fund an organization can spend

The adjusted type of bank reconciliation calculates the available cash in the bank at the end of the month. For instance, deposits in transits are added to the bank statement balance. Those deposits are not yet cleared in the bank because of timing differences. Furthermore, the outstanding checks are deducted from the ending balance shown in the bank statement. These are checks that are not yet sent to the bank by payees. Also, bank errors are either added or subtracted from the end balance. Sometimes a bank will incur errors in recording. Hence, a bank reconciliation statement is utilized to compute the actual cash balance.

To avoid issuing insufficient checks, the management will usually deduct deposits in transit from the adjusted balance from the bank reconciliation statement. Indeed, it is done to reduce the risk of unfunded checks. Also, deposits in transit have no guarantee that they will clear in a bank. In addition, the deposits in transit could include uncleared checks that are over one month. Thus, calculating the actual cash in the bank balance at the end of the month will assist in planning the next month’s disbursements.

7.Discover bank errors

Sometimes banks’ employees also commit mistakes when handling clients’ deposits and disbursements. For instance, incorrect check numbers were recorded during client check encashments. It happens sometimes, especially on some peak days. Also, other clients’ bank accounts were debited or credited instead of the transacting clients’ accounts. Incorrect bank account numbers were used by the teller when they transacted with customers. Furthermore,  interest income credited to an account was understated. It is common with High Yield Savings Accounts and time deposits.  Hence, a bank reconciliation statement could also be used to identify bank errors.

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