BANK RECONCILIATION

BOOKKEEPING COURSE: BANK RECONCILIATION

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Bank Reconciliation


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.

An example:
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:
  1. A credit for interest (current account) in an amount of $ 50 for June 30, xx (not recorded in Miles' accounts).
  2. A debit for bank charges for the current account in an amount of $10 as of June 30, xx (not recorded in Miles' accounts).
  3. A credit for a bank error in an amount of $ 300 dated June 27, xx, that belongs to Miller. Miles' account was credited in error (similar name).


The amounts that appear only in Miles' accounts
  1. A check for $ 160 that was paid to a supplier, that had not yet been paid in by the reconciliation date.
Preparing the Bank Reconciliation Statement


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:

  1. Does the transaction actually belong to us (Miles) - if so, if the transaction has only been recorded with the bank and not in our accounts - we must record it (the bank has already recorded it).
    On the other hand, it the transaction has only be as recorded in our accounts and not in the bank's accounts, a parallel record should be made on the bank section in the reconciliation statement.
  2. If the transaction does not belong to us - in this case the bank's records are in error, and the bank should correct its records.


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






Details
Miles Accounts    
Current Account with the Western Union Bank

Debit






     Credit      
Banks' Accounts
"Miles" Account



Debit






     Credit     
Balance to reconciliation date, 30.6.xx 1,000      1,500 
Amounts appearing only on the Bank Statement        
30.6.xx Credit: Interest 50       
30.6.xx Debit: Bank charges   10     
27.6.xx Credit: Error (belongs to Miller)     300   
Amounts that appear only in our accounts        
30.6.xx Check to supplier, Not yet presented to bank     160   
1050 10 460 1,500
Adjusted Balance as at 30.6.xx 1,040     1,040 
        Debit


      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.




Amounts that appear only on the bank statement


  1. Credit: Interest - The bank credited the account with $ 50 interest. From our point of view nothing has been recorded and therefore we will debit the bank with $ 50 (the Bank owes us another $ 50 in respect of the interest due to us).
  2. Debit: Bank Charges - The bank has debited us with $ 10. From our point of view, the matter has not yet been recorded. It is clear that the bank is entitled to $10 (bank charges due to the bank).
  3. Mistaken Credit - Deposit for Miller - The amount does not belong to us at all. The error is that of the bank. Therefore we will indicate in the bank section (the right side of the reconciliation statement) the fact that bank should debit us (this is how the bank will cancel the erroneous credit that appears in Miles' accounts). In the right hand part (Miles accounts) there is no need to record anything as from the start, we (Miles) have not made any record at all concerning the $ 300.


Amounts that appear only in our accounts.


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:

  Debit Credit
1. Debit: Western Union current account
Credit: Income from Interest
Current account interest - 30.6.xx
50


50
2. Debit: Expenses for bank charges
Credit: Western Union current account
Current Account Bank Charges - 30.6.xx
10


10



The Nominal Ledger, after the additional entries, will indeed, show a balance of $1,040 as follows:

WESTERN UNION -  CURRENT ACCOUNT
   Debit Credit   
Pre-reconciliation balance 1,000
Interest 50
Bank Charges 10
   
 
  1,050
 
   
   
  1,040
  10
   


      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.

THE IMPORTANCE OF THE BANK RECONCILIATION


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.



Bookkeeping records


For your convenience, here are the journal entries that relate to 3 subjects that we will discuss at various points. The subjects are:
          Subject
Salaries
Income Tax Deduction at Source
Value added tax




The Development of Bookkeeping The debit & credit rules Journal Entries Nominal Ledger Trial Balance Annual Statements (Profit & Loss/Balance Sheet) The Balance Sheet
Bank Reconciliation Salaries Tax Deduction at Source Value added tax





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