One of the most efficient and most commonly used tools for checking the accuracy of the bookkeeping system is a check known as the "Bank Reconciliation". This check is usually carried out once a month, at the end of the month.
What is Bank Reconciliation?
Let us assume for the purpose of this example that your name is Miles and that you are at the end of June xx. Your accounts show that the current account at Western Union Bank has a debit balance of $ 1,000 (as was explained, it is possible to relate to a current account as a personal account. In other words on June 30, xx, the bank owes you $ 1,000). Logically, on June 30, xx, the Western Union Bank accounts should show that you, Miles, have a credit with the bank of $ 1,000. If the balance in the Bank's accounts (as may be seen easily from the bank statement that is received each month by every business) is identical, this proves that your bookkeeping is incredibly efficient, all communications with the bank, which is usually a main component in the activities of the business, were recorded correctly.
In reality, the situation is a little different. Almost always, balance at the end of the month can not be reconciled because, in the main, as a result of data that appear in only one of the systems (our bookkeeping, the bank's accounts) but not in both of them at once. The aim of the Bank Reconciliation is to attempt to locate the reasons for the discrepancies because of which the two balances are not reconciled. It is clear that after "neutralizing" the reasons for the irregularities that are the cause of the lack of reconciliation, the balances in both places must be identical.
For purposes of the example, let us assume that the Western Union Bank accounts are to be reconciled to June 30,xx.
Details: The balance in Miles' account for the Western Union current account shows a debit balance of $ 1,000. The bank's accounts, on the other hand, show that on June 30, xx, Miles had a credit balance of $ 1,500. The reasons for the lack of reconciliation are as follows:
The amounts that appears on only thebank statement:
The amounts that appear only in Miles' accounts
The basic technique for finding the reason that the accounts are not reconciled is to prepare a "Reconciliation Statement", As a rule, check the following two possibilities for each item:
The Bank Reconciliation statement is in fact divided into 2 T accounts. The right side reflects our accounts (Miles' accounts) while the left side reflects the Bank's bookkeeping records that refer to us (in our case, it is reasonable to assume that in the records of the Western Union Bank, your account is called "Miles Account").
It is important to remember that from our point of view the current account with the Western Union may be referred to as a real account (the bank "owes" us or "is owed" by us, as may be the case.
We will go on to a presentation of the Bank Reconciliation Statement:
RECONCILIATION OF THE WESTERN UNION BANK ACCOUNT AS AT JUNE 30, xx
Notice that at in preparing the Reconciliation Statement:
Heading: The name of the bank for which we are preparing the reconciliation statement and the date of the reconciliation (June 20, xx).
First Row: A record (it is preferable to circle it or mark it in bold) of the balance that appears in our accounts and at the bank as at June 30, xx pre-reconciliation.
Check not yet presented- As at the date of reconciliation, the bank does not yet know that $ 160 is about to be deducted from our account. Had the bank known this, it would have debited us with this amount (debit, reducing our credit balance). The last row - the adjusted balance of $ 1,040.
That is the real balance in our account today (and not $ 1,00 or $ 1,500 as appeared in the pre-reconciliation balances.
The adjusted - balance - $ 1,040 - must be the same in both sections of the reconciliation statement, If the amount does not agree, it proves that we have not found the cause of the lack of agreement.
Journal Entries as a result of the Reconciliation
In our accounts (Miles' accounts) we have to make entries in the journal as a result of the amounts that appear on the right side of the Reconciliation Statement. The entries will be as follows:
The Nominal Ledger, after the additional entries, will indeed, show a balance of $1,040 as follows:
Comment: In the above example, the causes for the lack of agreement were presented at the beginning of the exercise. In real life, they must be "extracted" by comparing our bookkeeping accounts with the bank statement we received.
If the practice in your business is to reconcile the bank statement each month, your situation is relatively good. It is reasonable to assume that your bookkeeping is good. If, on the other hand, the last Bank Reconciliation is done in your business, let us assume, retrospectively for the last six months, you almost certainly have a problem. There is a reasonable chance that your Current Account in the bookkeeping system (as well as the rest of the system) is not up to date.
For your convenience, here are the journal entries that relate to 3 subjects that we will discuss at various points. The subjects are:
Bank Reconciliation Salaries Tax Deduction at Source Value added tax
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