Back to: ACCOUNTING, TAX, & REPORTING
Bank Reconciliation Definition
Bank reconciliation is a statement document that matches a company’s balance sheet cash balance with the actual balance in the bank. Reconciling the two helps a company manage accurate account records and detect embezzlement of funds and account manipulations.
A Little More on What is a Bank Reconciliation
A bank statement shows a company’s starting balance, transactions and ending balance in a given period. The ending balance on a bank statement normally differs with the company’s ending balance due to checks not received by the bank (deposits in transit), checks that have not been processes, bank service fees, interest paid by banks and not-sufficient fund checks.
Today, most companies are using specialized software to get frequent updates and do the adjustments required on the accounts.
Bank Reconciliation Procedure:
Start by comparing the checks that have been processed as seen on the bank statement with those that the company has received.
On the bank statement balance, add deposits in transit and deduct all outstanding checks to get the adjusted bank statement balance.
From the balance sheet balance, calculate and add interests earned and any other receivable amount.
Deduct bank service fees, NSF checks and penalties from the balance sheet balance to get the adjusted balance sheet balance.
After this reconciliation, the bank statement and balance sheet balances should match.
Example of Bank Reconciliation
XYZ company is preparing a bank reconciliation for the items:
- Bank statement with a $300,000 ending balance on February 20, 2018, whereas the balance sheet shows a $260,900 ending balance.
- Bank statement shows a $100 service fee
- Bank statement shows interest income of $20
- The company issued checks worth $50,000 that are yet to clear
- The company deposited $20,000 that has not been shown on the bank statement
- A check of $470 paid to the office supplier was misreported as $370.
- A note receivable totaling $9,800 was taken by the bank.
- A check worth $520 deposited has been charged back as NSF.
Amount Adjustments to books
Ending Bank Balance $300,000 None
Uncleared cheques deducted – $50,000 None
Deposit in transit added + $20,000 None
New Bank Balance $270,000 None
Ending Book Balance $260,900 None
Service charge deducted – $100 Debit expense, credit cash
Interest income added + $20 Debit cash, credit interest income
Error on check deducted – $100 Debit expense, credit cash
Note receivable added +$9,800 Debit cash, credit notes receivable
NSF check deducted – $520 Debts accounts receivable, credit cash
New Book Balance $270,000
References for Bank Reconciliation
Academic Research on Bank Reconciliation
- Checking accounts and bank monitoring, Mester, L. J., Nakamura, L. I., & Renault, M. (2001). University of Pennsylvania-The Wharton School. This paper shows that banks have almost unrestricted access to borrower data which help the bank to monitor the borrowers who happen to be the companies requesting bank statements. The paper further shows that banks use the data to determine credit ratings for of borrowers.
- The case for risk driven audits, Alderman, C. W., & Tabor, R. H. (1989). Journal of Accountancy, 167(3), 55. This study looks at the importance of financial audits when the company balance and the bank balances do not match. It shows how audits can help companies identify loopholes in accounting.
- Financial literacy among Australian university students, Beal, D. J., & Delpachitra, S. B. (2003). Economic Papers: A journal of applied economics and policy, 22(1), 65-78. This paper looks at the understanding of financial terms by Australian students and how financial literacy or lack of affects companies. It further links financial literacy to accounting discrepancies in firms.
- Financial information and the management of small private companies, Collis, J., & Jarvis, R. (2002). Journal of Small Business and Enterprise Development, 9(2), 100-110. This research studies how small companies use financial information. The research was aimed at identifying sources and use of financial information by small companies. It was identified that most small companies rely on cash flow and quarterly management accounts information.
- UK small owner-managed businesses: accounting and financial reporting needs, Sian, S., & Roberts, C. (2009). Journal of Small Business and Enterprise Development, 16(2), 289-305. This paper explores the need for financial reporting by small owner-managed businesses. It was found that though these businesses produce accounting records, most relying on accountants to prepare financial statements and they are often bewildered by the complexity of the process. The paper shows the need for specific guidance for small and medium sized businesses.
- Credit Var and risk-bucket capital rules: a reconciliation, Gordy, M. B. (2000, May). In Proceedings of the 36th Annual Conference on Bank Structure and Competition (pp. 406-415). Federal Reserve Bank of Chicago Chicago. This study at the relationship between Credit Var and risk bucket capital rules and how that relationship affects businesses. The study concludes that the two should reconcile to enhance accounting in business.
- Bank capital regulation: a reconciliation of two viewpoints, Keeley, M. C., & Furlong, F. T. (1987). (No. 87-06). Federal Reserve Bank of San Francisco. This study looks at the contrast between value maximization literature which says stringent capital regulation will shun the chances of bank failure and utility maximization literature which says stringent regulations will increase chances of bank failure. This paper shows why the utility maximization literature cannot be used to support any results in bank progress.
- A stochastic model of the internal control system, Yu, S., & Neter, J. (1973). Journal of Accounting Research, 273-295. This paper compares random financial control systems and well strategized systems in companies. It shows the implications of financial controls adopted by businesses to the ending balance.
- An integrated framework for eChain bank accounting systems, Lin, F., Sheng, O. R., & Wu, S. (2005). Industrial Management & Data Systems, 105(3), 291-306. This is a paper showing how Chain bank accounting systems have helped banks monitor cash flows of satellite vendors, shorten the long application period and offer quick loans.
- Using Bank Reconciliation to Check the Accounts, Liu, K., & Chen, J. (2013). Chinese Health Economics, (12), 108-109. This is paper showing the importance of manual adjustment of company and bank statement balances for bank reconciliation even when you have automatic financial reconciliation software.
- Bank Reconciliation, Stott, J. R. (1982). In Mastering Principles of Accounts (pp. 62-68). Palgrave, London. This paper shows why bank reconciliation is important by showing a case of a check that has been signed, recorded on a company’s ledger and sent. The check goes through a number of stages before it is reflected on the bank statement of the company.
- The Fading role of bank reconciliation in fraud prevention and detection, Mathuva, D. M. (2016). This report shows how bank reconciliation cannot be used to detect fraud. It observes that the cash book can have a number of anomalies which are not seen on bank statements. The report also shows how some companies have had to work with adulterated bank reconciliation for a long time.