Bank Reconciliation Process

Here we will be exploring bank reconciliation process.

Bank Reconciliation Process Steps

There are certain steps which need to be followed to make a bank reconciliation, i.e.:

identify total difference between cash book and bank statement
compare cash book entries with bank statement entries and tick them, since they will not be used further in the process
complete cash book by recording adjustments, i.e. information found on the bank statement, but not yet recorded into the cash book. At this stage timing differences should not be included
prepare a bank reconciliation statement, which will show reconciliation between the cash book and bank statement after the informational differences were recorded into the cash book and support the remaining differences, which will be timing differences.

Bank Reconciliation Sample For A Better Understanding

In order to understand bank reconciliation process let us analyze practical example.

1st step of bank reconciliation process: identify difference between cash book and bank statement. Below you are provide cash book and bank statement of a certain entity for April. Unadjusted cash book balance at the end of April is $3830. Bank statement balance as of end of April is $5778.

Non-adjusted Cash Book For April

Cash book	April
Day	Company	Inflow	Day	Company	Outflow
	Opening balance	3040	2	ACB	30
7	Zeta	165	3	BNC	456
7	Beta	340	15	GoodDay	1340
7	Gama	124	22	Mahony	976
7	Juditia	980	24	Levelita	192
15	Cash sales	20	26	Graham	367
15	Magnolia	34	30	Gory	45
22	Oregano	285
22	CoolStuff	1203
27	Orwel	456
30	Calipso	589
	Closing balance	3830

Bank Statement For April

Bank statement	April
Day	Transaction			Balance
1		Outflow	Inflow	3040
3	1345	30	0	3010
4	1346	456	0	2554
7	Utah PLC	0	450	3004
8	Schedules	0	1609	4613
16	Cheques	0	54	4667
16	1347	1340	0	3327
23	Cheques	0	1488	4815
23	1348	976	0	3839
24	1349	192	0	3647
27	Loan installment	130	0	3517
28	Cheques	0	456	3973
29	Dividends	0	706	4679
29	Medida	0	1200	5879
30	Interest	34	0	5845
30	Charges	67	0	5778

2nd step of bank reconciliation process: compare cash book and bank statement transactions and identify any transactions which are on the bank statement and which are not included into the cash book. These items will represent informational differenced, i.e. differences which are reasoned by those transactions directly recorded in the bank statement. When comparing cash book and bank statement, you need to take total amount for each day on the cash book and compare them to that day amounts in the bank statement. For example if we take April 7 cash book entries, we have 4 different cash inflow. On the bank statement we see one amount of $1609 on April 8, i.e. 4 cheques were cleared by the bank on April 8.

3rd step of bank reconciliation process: adjust cash book by informational differences. In the bank statement above you can see the items which are not on the cash book and they are marked in red. These transactions must be recorded in the cash book, i.e. we will have to adjust cash book by these items. The adjustments are provided below:

Adjustments To The Cash Book

Cash book adjustments
Day	Transaction	Amount
Unadjusted balance		3830
7	Uta PLC	450
27	Loan payment	-130
29	Medida	1200
29	Dividends	706
30	Interest	-34
30	Charges	-67
Adjusted balance		5955

More detailed explanations on the cash book adjustments:

On April 7 and April 29 the company received payment from Uta PLC and Medida amounting to $450 and $1200 accordingly, we add these amounts to the cash book balance.
On April 27 bank decreased cash balance by $130 which is installment of the loan paid by the payment order (i.e. regular payment made by bank based on the payment order from the company). We decrease cash book balance by this amount.
On April 29 the company received dividends directly to the bank account amounting to $706. We increase cash book balance by this amount.
At the end of April on April 30 bank recorded interest due and bank charges amounting accordingly to $34 and $67. We decrease cash book balance by these amounts.

4th step of bank reconciliation process: prepare bank reconciliation indicating timing differences between adjusted cash book balance and bank statement. If we compare adjusted cash book balance of $5955 with the bank statement balance at the end of April we can see that still there is a difference. The reason for such difference is time, i.e. certain transactions were already recorded in the cash book, but not yet in the bank statement. We need to identify these differences and the will be included into the bank reconciliation.

Referring to the cash book above such items which are not on the bank statement are marked in blue. These items were recorded in the cash book as payments received or made, but cheques were not yet cleared by the bank.

On April 30 receipt of $589 from Calipso was recorded in the cash book, however the cheque supporting this receipt was cleared by the bank only in May, therefore we deduct this amount from the adjusted cash book balance to get the bank statement balance as of April.

On April 26 and April 30 cheques for payment to Graham and Gory amounting accordingly to $367 and $45 were issued, but not yet cleared by the bank. Therefore we add up those amounts to the adjusted cash book balance and finally we get the same amount which is on the bank statements of end of April, i.e. $5778.

Bank Reconciliation as of end of April	Amounts
Adjusted cash book balance	5955
*Deduct cheques received and included into the bank after period end*
Receipts from Calipso	-589
	5366
*Add cheques presented to the bank after the period end*
Payment to Graham	367
Payment to Gory	45
Reconciled balance	5778

So the purpose of bank reconciliation process is to adjust cash book with those items which must be included since had an impact on the cash balance during the particular period. Afterwards to clarify and support any remaining differenced between adjusted cash book balance and bank statement balance and such differenced are usually due to difference in timing of issuing cheques and clearing those cheques by the bank.

New Video Course "Accounting Skills In 30 Steps"

Learn Intermediate Accounting with the new comprehensive video course Accounting Skills In 30 Steps. It includes 30 essential steps you should follow to get accounting knowledge or improve your current one. Also you will have a possibility to practice your knowledge with the exercises and problems included. Watch, listen, practice and learn with Accounting Skills In 30 Steps.