What is a Bank Reconciliation?

What is a Bank Reconciliation?

Definition

A bank reconciliation matches a company’s cash balance in its books of accounts with the balance in its bank statement. The exercise may reveal that it is necessary to make certain entries in the company’s accounting records. It is also possible that the bank could have mistakenly levied some charges on the company. A bank reconciliation will help to identify these issues.

What does bank reconciliation mean?

The balance in the bank statement rarely matches with the balance in the company’s cash account. Why is that?

Consider the following:

⇨ A company issues a check to a vendor on the 29th of April. The vendor deposits this check on the 2nd of May. On the 30th of April, the bank statement will show a higher balance than the company’s cash account.

⇨ On the 30th of April, expenses of $100 are charged by the bank. These appear in the bank statement but not in the company’s records on that date. The company’s cash account and the bank statement will show a difference of $100 until the company’s accountant makes the $100 entry in the books of accounts.

⇨ A customer pays the company by check. The receipt of $10,000 is recorded in the company’s ledger on the 30th of April, but the check is deposited in the bank on the 1st of May. The balance in the bank account at the end of April will be lower than the balance in the company’s cash account by this sum.

It is essential for every company to carry out a periodic bank reconciliation. Preferably, the exercise should be conducted every month. The objective of the exercise is to add or subtract the relevant amounts from the bank statement balance on a certain date to arrive at the company’s cash balance.

Example of a bank reconciliation

Here’s the bank reconciliation statement prepared by Dalton Construction Company on April 30, 2018: Bank Reconciliation Summary A bank reconciliation is a basic but essential accounting exercise. Every organization needs to ensure that it reconciles its bank statement with its cash balance on a regular basis. The process of reconciliation will help in identifying missing accounting entries and allow the accountant to correct the company’s records.