Reconciling Cash Accounts and Bank Statements

A bank reconciliation is an internal control that ensures that the cash in its accounts equals what it has recorded in its books.

Learning Objective

Describe how a company uses a bank reconciliation as an internal control

Key Points

Bank reconciliations are necessary because legitimate transactions that a business has recorded in its books might not be listed on its bank statements and vice versa.
A bank reconciliation consists of a book balance column and a bank balance column. One column is adjusted by adding all of the legitimate transactions that either the bank statement or books do not show. The reconciliation is complete when the two columns equal each other.
When a legitimate transaction that was not recorded in the books is discovered, it must be added by recording a journal entry.

Terms

bank statement
a communication from a bank to a person holding an account in that bank, usually issued monthly, detailing the value of the holdings in that account and the effects of all transactions occurring with respect to that account
journal entry
A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced. " Journal entries can record unique items or recurring items, such as depreciation or bond amortization.
Bank Reconciliation
A process that explains the difference between the bank balance shown in an organization's bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records at a particular point in time.

Full Text

A bank statement only reflects a specific period of time, such as one month . However, it takes the banks time to prepare the statement and send it out. Therefore, while a bank may prepare a statement for the month of October, a business might not receive it until a week later.

As a result, a bank statement will generally not reflect the amounts that a company has on its own books. This can be due to a few reasons. The company could have issued several checks prior to the end of the period, but the check holders had not cashed the check. The business could have also received some cash amounts prior to the end of the period covered by the statement, but was unable to deposit those amounts until after the period ended. The differences could also be due to mistakes, either by the bank or in the company's books. The differences could also be due to something more troublesome, such as theft.

A bank reconciliation is a process that explains the difference between the bank statement on the amount shown in the organization's own financial records. This process is important because it ensures that any differences are due to the timing of payments and not because of a mistake or theft.

Reconciliation Process

A bank reconciliation consists of two columns; one for the book balance, the other for the bank balance. The person reconciling the accounts then adjusts one column by adding deposits that had not yet been recorded and subtracting checks and other outlays that had not yet been cashed when the statement had been prepared. The reconciliation is not complete until the adjusted column equals the unadjusted column.

There may be some cases where the process reveals a legitimate transaction that was not recorded in the books. When that occurs, the person responsible for the business's books must record the transaction using a journal entry.

Cash

Due to the amount of time between when a bank statement is prepared and when it is received by a business, the document may not accurately reveal what the business actually has in terms of cash. This is why reconciling the bank statement is necessary.

[ edit ]

Prev Concept

Using a Bank for Control

Basics of Cash Management

Next Concept