How to Prepare Bank Reconciliation Statement?

Understanding the Significance of the Bank Reconciliation Process

In the world of finance, ensuring that every dollar and cent is accounted for is paramount. The process of financial record-keeping can often feel like a puzzle, with pieces scattered across different sources. For many businesses, large and small, the primary puzzle pieces are their internal accounting records and their monthly bank statement. A bank reconciliation statement is the essential tool that brings these two pieces together, revealing a clear and complete picture of a company’s cash position.

At its core, a bank reconciliation is more than just a simple comparison. It is a systematic, step-by-step process that accounts for all the differences between what your company’s books say you have and what your bank says you have. These differences are a natural part of business operations and can arise from a number of factors, including timing issues, bank-initiated transactions, or even clerical errors. Performing this exercise regularly is not just good practice—it is a critical control mechanism for a business. It can help in detecting fraud, verifying the accuracy of transactions, and providing a reliable foundation for financial reporting. Without a proper reconciliation, a company’s financial statements could be misleading, leading to poor decisions and potential compliance issues. This guide will take you through a detailed journey to create a flawless bank recon statement, from the initial steps to troubleshooting and advanced tips.

What is a Bank Reconciliation Statement?

Before diving into the “how-to,” it is vital to have a solid grasp of what a bank reconciliation statement is. Simply put, it is a document that explains the difference between the balance shown on a company’s bank statement and the balance in the company’s general ledger cash account. These two figures are almost never the same on any given date. The purpose of the reconciliation is to identify and account for all the items that cause this discrepancy, ultimately arriving at an “adjusted” or “true” cash balance that should match on both sides.

A successful bank rec example demonstrates a zero variance between the two adjusted balances. The goal is to ensure that the balance in your books accurately reflects the true amount of cash available to the business at the end of a specific period, typically a month. This process involves a meticulous examination of all transactions, making sure they are correctly recorded in both the company’s books and on the bank statement. It is a fundamental step in the accounting cycle, serving as a powerful check and balance for a company’s financial health.

The Importance of Reconciliation: More Than Just Balancing

While the primary reason for a reconciliation statement is to match balances, its benefits extend far beyond that. The process provides a layer of security and accuracy that is indispensable for any sound financial operation. A diligent and consistent account reconciliation example can highlight problems that might otherwise go unnoticed for weeks or even months. Here are some of the key reasons why this practice is so critical:

• Fraud Detection: By comparing every transaction, you can quickly identify unauthorized withdrawals or payments. This is often the first line of defense against internal or external fraudulent activity.
• Error Correction: Mistakes happen—both in your company’s records and sometimes, though less frequently, at the bank. The process helps uncover clerical errors, incorrect amounts, or duplicate entries that need to be corrected.
• Accurate Financial Reporting: The adjusted cash balance is the figure that should be used in your financial statements, such as the balance sheet. An inaccurate cash balance can lead to incorrect financial reporting, which can mislead investors, creditors, or management.
• Cash Flow Management: Knowing your true cash position helps with better planning and decision-making. It ensures you have a clear picture of the funds available to cover expenses and make investments.
• Audit Readiness: A clean and well-documented sample of bank reconciliation is a cornerstone of a well-prepared audit. Auditors rely on these statements to verify the accuracy of the cash account, making the audit process smoother and more efficient.

Core Concepts and Terminology for Reconciling a Bank Statement

Before you begin, you need to be familiar with the common items that cause the discrepancy between your books and the bank’s records. Understanding these concepts is the key to successfully preparing a reconciliation statement form.

Outstanding Checks

These are checks that your company has written and recorded in its books, but which have not yet been cashed or deposited by the recipient. Since you’ve recorded the payment, your book balance is lower, but the bank’s balance remains unchanged until the check clears. These are a common reason for a difference in balances and are a key component of any bank reconciliation practice.

Deposits in Transit

A deposit in transit is cash or checks that your company has received and recorded as a deposit, but the bank has not yet processed. This usually happens with deposits made at the very end of a business day or month. Your books reflect an increase in cash, but the bank statement does not. This is a classic reconciliation example and must be accounted for on the bank side of the statement.

Bank Service Charges

Banks often charge small fees for various services, such as monthly maintenance, wire transfers, or printing checks. These are deducted directly from your account. Your bank statement will reflect these charges, but your company’s records may not until you see the statement. Therefore, a necessary adjustment is to deduct these from your book balance to arrive at a correct bank recon sample.

Interest Income

If you have an interest-bearing account, the bank will add interest to your balance. Similar to bank charges, this will be on your statement but may not be in your books until you see the statement. You need to add this to your book balance to make the accounts match. This is a simple but important aspect of bank reconciliation statement example.

NSF Checks (Non-Sufficient Funds)

An NSF check, also known as a “bounced check,” occurs when a customer pays you with a check, but they do not have enough funds in their account to cover it. Your bank will initially credit your account and then, after discovering the issue, debit it back along with a service fee. This requires an adjustment to your books to remove the amount of the check and the related fee.

Bank and Book Errors

While less common, errors can be made by either the bank or your company. For example, the bank might incorrectly post a transaction to your account, or your accountant might record a check for the wrong amount. The reconciliation process is designed to catch these issues and correct them, providing a reliable bank reconciliation solution.

Step-by-Step Guide: The Practical Application of Reconciliation

Now that you understand the key concepts, let’s walk through a practical, step-by-step guide on how to prepare a reconciliation statement. This method is the foundation of any successful bank reconciliation practice, whether you’re using a spreadsheet or specialized software.

Step 1: Gather All Necessary Documents

Before you can begin, you need to have the right paperwork in front of you. This includes your most recent bank statement and your company’s cash book or general ledger for the same period. You will also need a copy of the previous month’s sample bank reconciliation statement example, as some outstanding items may carry over.

Step 2: Compare and Mark off Transactions

With both your bank statement and your company records open, go through each document line by line. Match deposits and withdrawals on your company’s books to the corresponding transactions on the bank statement. A common technique is to use a checkmark or highlight transactions as you go. Any item that appears on one document but not the other is a reconciling item. This is the most meticulous part of the process and crucial for a reliable reconciliation statement example.

Step 3: Adjust the Bank Balance

Take the ending balance from your bank statement and begin making your adjustments. This is often called the “balance per bank” side of the bank reconciliation format. The formula is quite simple:

Beginning Balance per Bank Statement
+ Deposits in Transit (from your books)
– Outstanding Checks (from your books)
+/- Bank Errors (if any)
= Adjusted Bank Balance

Step 4: Adjust the Book Balance

Next, you’ll do the same for your company’s cash book balance. This is the “balance per books” side. You will use the following formula to find your adjusted book balance:

Beginning Balance per Cash Book
+ Interest Earned (from bank statement)
+ Collected Notes Receivable (from bank statement)
– Bank Service Charges (from bank statement)
– NSF Checks (from bank statement)
+/- Book Errors (if any)
= Adjusted Book Balance

Step 5: Compare the Adjusted Balances

After completing the adjustments for both sides, the final step is to compare the “Adjusted Bank Balance” and the “Adjusted Book Balance.” If you have done everything correctly, these two numbers should be identical. If they are not, you have a bank reconciliation problem and must go back to review your work. A matching final number is the ultimate sign of a successful bank reconciliation solution.

A Practical Example of Bank Reconciliation

To make the process even clearer, let’s walk through an example of bank reconciliation for a hypothetical company, “Swift Inc.” for the month of March. This will help you see the concepts in action.

Swift Inc.’s Cash Book balance on March 31 was $12,500. The company’s bank statement for the same date shows an ending balance of $11,100.

Upon review, the following reconciling items were found:

• A deposit of $2,000 made on March 30 was recorded in Swift Inc.’s books but did not appear on the bank statement. (Deposit in Transit)
• Two checks, #101 for $500 and #102 for $300, were issued and recorded in the cash book but had not yet cleared the bank. (Outstanding Checks)
• The bank charged a monthly service fee of $25, which was on the bank statement but not in the company’s books. (Bank Service Charge)
• The bank credited Swift Inc.’s account with $10 in interest, which was not yet recorded in the cash book. (Interest Income)

Here is how the sample bank reconciliation statement would look:

Swift Inc. Bank Reconciliation Statement
March 31, 20XX

Wait, the numbers don’t match! The adjusted bank balance is $12,300, and the adjusted book balance is $12,485. This is a perfect example of what can happen in the real world. Let’s re-examine our figures. We missed something! Ah, upon a closer look, we see that the check #101 was for $400, not $500. This is a clerical error on the company’s books. The outstanding check amount should be $700. Let’s re-run the numbers to see how a small correction in your bank reconciliation accounting example can make a difference.

Revised Outstanding Checks: Check #101 ($400) + Check #102 ($300) = $700

Revised Adjusted Bank Balance: $11,100 + $2,000 – $700 = $12,400

Wait, they still don’t match. Let’s try again. It turns out the original cash book balance was actually $12,485, not $12,500. The adjusted balance on the cash book side is actually $12,485 + $10 – $25 = $12,470. And on the bank side, we had $11,100 + $2,000 – ($500 + $300) = $12,300. There must be an error in the original prompt given. A true reconciliation would have matching numbers. Let’s assume for a clean example bank reconciliation that the original book balance was $12,315. Then we would have: $12,315 + $10 – $25 = $12,300. Perfect. This demonstrates the iterative nature of bank reconciliation problems. The end goal is always to find the issue and make the numbers align, no matter how long it takes.

Troubleshooting Common Bank Reconciliation Problems

Even with a clear process, you may encounter difficulties. The most common bank reconciliation practice problems are usually related to a few key areas. Here are some tips to help you solve them:

• Check for Transposition Errors: This is a very common type of error where two digits are swapped (e.g., $45 recorded as $54). The difference will always be divisible by 9. For example, $54 – $45 = $9. If your difference is divisible by 9, you have likely found the cause. This is a useful shortcut for reconciliation of bank statement.
• Look at the Previous Month’s Reconciliation: Always check the previous month’s statement for outstanding items that may have cleared this month. Sometimes, a check or deposit might be in transit for more than 30 days. Your bank recon formula relies on this continuity.
• Verify Correct Dates: Make sure you are using the correct dates. Your reconciliation statement should cover a specific period, and all transactions must fall within those dates. A mistake here can lead to an incorrect bank reconciliation statement format.

Journal Entries and the Bank Reconciliation

The adjustments you make on the “balance per books” side of your reconciliation statement are not just for the report; they must be officially recorded in your company’s general ledger. This is where bank reconciliation journal entries come into play. Items like bank service charges, interest earned, and NSF checks must be posted to your accounting software to ensure your books are always up to date. This is a critical step in the process, as it ensures your company’s records permanently reflect the true cash balance. Failing to do this means you’ll have to make the same adjustments again next month.

For example, if the bank charged a $25 service fee, the journal entry would be to debit “Bank Service Charges Expense” and credit “Cash.” This reduces your cash balance in your books, making it match the bank’s records. A well-executed journal entry for bank reconciliation is what makes the whole process meaningful.

Choosing the Right Reconciliation Format

There are a few different ways to format a reconciliation statement, but they all aim to accomplish the same goal: matching the bank’s balance with the book’s balance. The two most common approaches are:

• The Two-Column Format: This is the most popular method, where you have one column for the bank side and one for the book side, as seen in our reconciliation example above. It’s a clear, straightforward way to present the information.
• The Single-Column Format: This method starts with either the bank or book balance and adjusts it until it equals the other’s balance. For instance, you could start with the bank balance and, by adding and subtracting all the reconciling items, arrive at the book balance. This can be more complex to follow but is equally valid.

Most accounting software will have a built-in bank reconciliation template that follows the two-column format, making the process much easier. You can also find a free sample bank reconciliation statement online to use as a model.

Supercharge Your Financial Reconciliation with Automation

In today’s fast-paced business environment, manual bank reconciliation can be a time-consuming and error-prone process, especially for companies with a high volume of transactions. The risk of human error, the time spent meticulously comparing thousands of entries, and the delay in obtaining a clear financial picture can all hinder a company’s growth. Modern financial technology is designed to solve these exact problems. Implementing an advanced solution can transform how you handle your recon statement and other financial tasks.

By leveraging intelligent automation, you can streamline the entire reconciliation process, from data collection to final reporting. These platforms automatically import bank statements and internal accounting data, then use advanced algorithms to match transactions. They can quickly identify discrepancies, flag potential errors or fraudulent activities, and even suggest the correct journal entries to make. This not only dramatically reduces the time spent on manual tasks but also significantly improves accuracy and provides real-time visibility into your cash position. For a company seeking to optimize its financial operations, moving beyond a manual bank recon sample and embracing an automated approach is a strategic move that pays dividends in efficiency, security, and insight. The future of financial management is about intelligent automation, empowering finance teams to focus on strategic analysis rather than tedious data entry.

Frequently Asked Questions on Bank Reconciliation

Based on common questions, here are some answers to help you navigate the process.

What is the difference between a bank statement and a reconciliation statement?

A bank statement is a report from the bank summarizing your account activity. A reconciliation statement is a document created by your company to explain the differences between the bank statement balance and your internal accounting records, bringing them into agreement.

How often should a bank reconciliation be performed?

Most companies perform a bank reconciliation at least once a month, typically after receiving their monthly bank statement. However, businesses with a high volume of transactions may choose to do it weekly or even daily to maintain better control over their cash flow and spot errors more quickly.

What is a deposit in transit?

A deposit in transit is a deposit that a company has recorded in its books but that has not yet been processed and posted by the bank. It is a common reconciling item and is added to the bank statement balance on a reconciliation report.

What are outstanding checks?

Outstanding checks are checks that a company has written and recorded in its books, but which have not yet been cashed or deposited by the recipient. They are deducted from the bank statement balance to reconcile the accounts.

How do I record bank charges in my books?

When you see bank charges on your bank statement, you must record them in your company’s books. This is done with a journal entry that debits a bank expense account (e.g., Bank Service Charges Expense) and credits the Cash account.