Businesses keep careful track of their financial transactions each month, but without a bank statement to compare its records with, the records could be incomplete or inaccurate. Similarly, banks do make errors, and simply trusting that all the transactions posted to the account are for the correct amounts is a risk no company should take. Only by comparing the company’s records with the bank statement on a regular basis can a business ensure they have the whole story. This process is called bank reconciliation.
It may sound like an intimidating concept to those that are not well versed in the ways of bookkeeping, but even complete novices will find accounting tasks to be a much simpler task with the help of accounting software programs like QuickBooks, which systematically organizes such processes into easy to understand steps. Take an Udemy course in QuickBooks today to become more familiar with one of the most commonly used accounting programs and save yourself a lot of frustration in the process.
Putting it simply, the bank statement and company’s account records could very easily differ from each other at the end of the month, and the purpose of a bank reconciliation is make sure those numbers match up. Typically, the reason the total don’t agree with each other is there are transactions that haven’t posted yet, either in the form of an outstanding deposit or an outstanding check, but there are other possibilities as well. Check out the basic bank reconciliation statement format to clear up any questions you may have before getting into the example to follow.
Say your company’s monthly bank statement shows a cash balance of $1,500 at the end of the month but your company records indicate the balance for the cash account should be at $2,000. Now that you have the totals from each side, you can begin making necessary adjustments to the balances based on the information you have available. In this example, let’s say the following information is available by looking at the bank statement as well as your company records:
- Outstanding checks equaling $200
- Outstanding deposits equaling $900
- Interest earned by the company in the amount of $100
- A bank service charge for $25
- A $50 fee charged by the bank for a $100 NSF check written by a customer; the company also did receive the amount of the check itself as a result
- Notes receivable collected by the bank in the amount of $257
- The bank made an error with one of the company’s deposits, entering in what should have been a $375 deposit as a $357 deposit
With this information, you can then recalculate both balances, starting with the bank statement total. In this example, the bank shows that the company’s cash balance is at $1,500. Here you will take into account the information your records show that the bank does not yet know, items number 1 and 2 from the list above. This is all the information you need to create an adjusted, up-to-date total for the bank statement. Since the company will be losing $200 when the outstanding checks post but gaining $900 from pending deposits, you will in fact add $700 to the $1,500 balance, resulting in an adjusted total of $2,200.
Now you will need to do the same thing for the balance of your company book totals, and for the bank reconciliation process to be considered successful, that amount will also need to come out to $2,200 after adjusting for the transactions listed above.
Your company books are missing a few vital pieces of information that the bank statement provides for you. Recall item 3 on the list above; it states that the company has earned $100 in interest for the month, and until you received the bank statement, you had no way of knowing this. Conversely, you had recorded that $100 payment for services rendered to a customer, but it turned out he didn’t have the funds his check promised to pay you after all because the check bounced.
You will now have to subtract that amount from your cash account, as it still needs to be collected from the customer. This effectively erases the gain made from the interest. Furthermore, the bank charged a $50 fee for the bad check in addition to a standard $25 dollar service fee charge.
At this point in the reconciliation process, the $2,000 amount has actually gone down $75 to $1,925, so clearly your work isn’t done; when all transactions are accounted for, again, you will want to see an adjusted balance of $2,200, just as you did when working with the bank statement balance.
Thankfully, items 6 and 7 still remain, and they will be able to clear up the remaining discrepancies. Because your company loaned out money to another entity in the past, it is scheduled to receive regular repayments for the loan it issues plus whatever interest charges were agreed to at the time. For the month in question, the notes receivable amount came out to $257.
Furthermore, in the process of cross-referencing the bank statement with your company records, you noted that you show a deposit for $375 on the same day the bank reflects a deposit in the amount of $357 was made. Obviously, one party incorrectly recorded this transaction. With a little research, this is easily cleared up, as it was determined the bank teller simply keyed in the numbers incorrectly. The difference in the two deposit amounts brings an additional $18 into your cash account. Adding the notes receivable amount ($257) up with the $18 bank error comes out to $275.
If you recall earlier, the adjusted balance of the book records stood at $1,925 prior to accounting for items 6 and 7 on the list, and that extra $275 brings the final adjusted balance of the company books to $2,200. Since this is the exact same amount you got when adjusting the balance using the bank statement, all transactions have been accounted for, and you can rest assured your company’s finances are all in order.
Barring extremely unusual circumstances, reconciling a bank statement is a pretty painless task in the world of accounting, but if you have a natural talent for this kind of process, a career in accounting could be perfect for you.
Anyone interested in a career in the business field would benefit from an accounting background, and mastering accounting skills is a great way to get started. Those who understand accounting understand the basic language of business. Further your qualifications by considering one of Udemy’s many courses in accounting and finance. Those who are still learning the basics will want to begin with an introductory accounting course, while those who are already familiar with the industry and simply want to take a CFA level 1 course to prepare for the rigorous exams required to become a Chartered Financial Analyst.
Maybe getting too bogged down in the more complicated accounting processes does not suit you and you’re more interested in starting up your own small business than learning all the ins and outs of accounting. In that case, you could also try a course in finance and accounting for startups in order to focus more on just the information you need to succeed in the business world while being able to manage your company’s finances adequately at the same time.