It is important to understand what a bank reconciliation statement is. A company must know how much cash they have at any given time to ensure they are on target for bills, payments, and credits. However, the cash balance at the bank may be different from the balance shown by accountants at the company. This can happen for various reasons, such as there are outstanding checks, deposits may not have reached the bank yet or not have posted yet, errors, and more.
Whenever the cash in the bank and the accountant’s records do not match up, companies will have to carry out a bank reconciliation process which will prepare a statement that will explain the difference in the company’s account and the cash balance according to the company’s bank statement. For people that want more in-depth accounting, it is possible to learn accounting in just 30 days. Udemy offers a course on banking fundamentals to get you started.
Types of Transactions That Appear
Transactions that appear in a company’s records, but not in a bank’s records can include:
- Deposits in Transit
- Checks Outstanding
A deposit that has been sent to the bank by the company may not have reached the bank yet is considered a deposit in transit. This occurs very frequently, and there is no cause for alarm if this happens; however, this type of transaction will cause numbers to not match up and this could cause problems for the company.
A check that has been issued by the company, but hasn’t been cleared by the bank is considered a check outstanding. Again, this happens frequently and is normal, but it can still cause a problem if the statement must be shown before a new statement can be issued.
There are also some transactions that can appear in the bank records, but, not in the company’s records. These include:
- Service charges
- Interest income
- NSF checks
A service charge is a charge deducted by the bank. Many banks include these fees, and it is up to the company to understand this. In some cases, the company will not know the amount of the charge under the bank statement has been issued.
Some companies sign up for special bank accounts that provide interest on money that is in the bank. This is called interest income. This can be beneficial to the company, but they generally won’t know if they have any interest income or how much it will be until the bank statement arrives.
NSF stands for “non sufficient funds”. When a company deposits a check in the bank account from a customer and the customer doesn’t have enough money in their bank to cover the check, the company’s bank cannot receive payment on the check, which in turn causes the company to not receive the funds, as well.
This is an example of a basic bank reconciliation statement, but it is possible to get more advanced with financial reporting and Udemy can help with CFA Level 1 Accounting if you want to know more.
If your company has a bank statement that is dated December 31, 2012 with a balance of $24,594.72, but your cash records for the same date only show a balance of $23,196.79, a bank reconciliation statement will be required.
Other information needed can include outstanding checks, missing deposits, an NSF check, service fees, interest income, and more.
For this example, you know that there are four checks that are still outstanding that total up to $830.71. The check numbers (so you can correspond them to your information) are 846, 848, 879, and 880.
One deposit of $400 that was dated the same day as the bank statement did not clear, and an NSF check worth $850 was returned by the bank. Your company was also charged a service fee of $50, and interest income earned on the cash balance was $1,250.
The company’s cash records mention a deposit of $340, when in actuality the deposit was $430. The bank received a note that was received on behalf of the company for $550, which included interest income of $50. From that amount, the bank charged a collection fee worth $10.
Most of the information above could not be known by the company’s accountant. Therefore, a bank reconciliation statement must be issued to explain the above and also to explain why there was such a difference between the company’s information and the bank’s information.
Using the above information, the bank reconciliation statement format would look like this:
As you can see in the above example, the adjusted bank balance and the adjusted book balance are the same, meaning that everything checks out completely.
First, you must include the bank’s balance and add the deposit in transit that wasn’t included on the bank statement. Then, you must subtract the outstanding checks that also weren’t on the bank statement. In this case, the outstanding checks were added together and then subtracted, providing us with the adjusted bank balance.
On the next line, you would start balancing per the books or accounting. You would include the number your company had and add all the interest income and the note receivable. The understated deposit amount is also included. Here, they had made a mistake with a deposit, transposing some of the numbers. The amount (90.00) listed in the bank reconciliation statement is the difference from what the deposit actually was and what the company used. Those were added together and added to the books balance.
Then, the service and collection fee, along with the NSF check were subtracted from the amount ($25,074.01) to get the adjusted book balance.
Before the company is able to write out the bank reconciliation statement, they must know all the fees and interest income, along with the other information. Knowing what information you need could be extremely helpful; you can always call and ask the bank or look at your bank statement. However, some information, such as the outstanding checks and transit deposit, will not be known to the bank.
Knowing about financial reporting for either your personal accounts or business accounts is important to know. There is a great deal of information for both, but Udemy offers courses on Business Finance if you are not familiar with how to handle bank reconciliation for a business. Check out Udemy today for all your financial banking help from business and personal banking to investment banking.