What is Bank Reconciliation Statement

A bank reconciliation statement is an accounting statement prepared at the end of the bank reconciliation process. So, what is bank reconciliation? In some instances, with regard to accounting standards, a company’s cash balance at the bank and its cash balance do not tally. This may be due outstanding cheques, deposits that may be in transit to the bank, errors that may have occurred, etc. So, in such instances, the companies need to consider a bank reconciliation process, which prepares an accounting statement, or in other words, a bank reconciliation statement for the difference between the cash balance that exists in the company’s cash account and the outstanding amount in the bank statement.

Few transactions that are only included at the company records and not in the bank statement are mentioned below:

• Deposits in Transit

These include the deposits made by the company that are not received by the bank at the time of bank statement preparation.

• Cheques Outstanding

These involve cheques, which are issued by the company, but not yet presented or cleared at the time of bank statement preparation.

In some instances below transactions only appear in bank statements and not in company’s cash account:

• Service Charges

These charges have been included in the bank statement, but not in the cash account prepared by the company.

• Interest Income

This amount is initially entered in the bank statement as the company is unaware of the exact amount.

• NSF Cheques

NSF refers to “not sufficient funds.” The company deposit these cheques in the bank account, but the bank is unable to claim the money as there are insufficient funds in the account.

Problems associated with bank reconciliation statement

Several issues can be notified when preparing the bank reconciliation statement as stated below:

• Continuously presenting uncleared cheques

There may be a considerable amount of cheques that are not presented to the bank for a certain period or they may not be presented forever to do the payments. For some time, these may be considered as uncleared cheques, but in the long run it is required to contact the payee either to issue new ones or to avoid the old cheques.

• Cheques clear the bank after having been voided

In some situations, where the old cheque is voided to provide a replacement cheque, the payee may present the original cheque to the bank and the bank will definitely reject it. If the cheque is not voided with the bank, then it is essential to record the cheque with a credit to the cash account and a debit to indicate the reason for the payment (such as an expense account or an increase in a cash account or decrease in a liability account). By any circumstances, if the person does not cash the replacement cheque, need to void the cheque with the bank in order to avoid double payment.

• Deposited cheques are returned

There are certain situations where the bank refuses the cheque deposits as it is raised on a bank account which is situated in another country. In those situations, the accounting entry needs to be reversed by crediting the cash account to decrease the cash balance with the relevant debit entry to increase the trade receivables account.

Photos By: Peter Baskerville (CC BY-SA 2.0), Bill & Vicki T (CC BY 2.0)