What is a Bank Reconciliation
A bank reconciliation is a process performed by a company to ensure that its records (check register, general ledger account, balance sheet, etc.) are correct. This is done by comparing the company’s recorded amounts with the amounts shown on the bank statement. Any differences must be justified. When there are no unexplained differences, accountants state that the bank statement has been reconciled.
The bank reconciliation is an important part of a company’s internal controls over its assets. To be effective, it should be done by someone other than an authorized check signer and/or record keeper.
Example of a Bank Reconciliation
Let’s assume that a new company opens its first checking account on June 4 with a deposit of $10,000. During the month of June the company wrote five checks with a total of $5,000. It also made a $2,000 deposit in the bank’s night depository after banking hours on June 30. As a result, the company’s Cash account (in its general ledger and referred to as the “books”) as of June 30 shows a positive, debit balance of $7,000.
The bank statement shows a June 30 balance of $5,975. Note that this balance is different from the company’s general ledger’s Cash account balance of $7,000. Generally, neither balance is the correct amount of cash that should be reported on the company’s balance sheet.
To reconcile the company’s balance and the bank’s balance requires comparing the details. To illustrate, let’s assume that:
- The bank statement shows a bank service charge of $25, but the company’s general ledger does not
- The $2,000 deposit made by the company on June 30 is not shown on the bank statement
- One of the company’s five checks written in June having an amount of $1,000 does not appear on the bank statement
We prefer to perform the bank reconciliation by adjusting both the company’s cash balance and the bank statement balance to be the correct amount of the company’s checking account balance, as shown here:
- The company’s Cash account balance of $7,000 needs to be decreased by $25 for the bank service charge. As a result, the adjusted balance per the company’s books is $6,975. This is the amount that the company can report on its balance sheet if it agrees to the adjusted balance per the bank.
- The bank statement balance of $5,975 needs to be increased for the $2,000 deposit and to be decreased by the $1,000 check. After these adjustments, the adjusted balance per the bank is $6,975 ($5,975 + $2,000 – $1,000).
Since both the company’s books and the bank statement have an adjusted balance of $6,975 the bank statement has been reconciled.
For a more detailed and thorough illustration of a bank reconciliation and to learn the related terminology, be sure to see our topic Bank Reconciliation.
