HOW TO PREPARE A BANK RECONCILIATION STATEMENT

I have a friend who failed to secure an accounting job recently because he was not able to provide a simple explanation of what a bank reconciliation statement is in an interview. His defense was that he is not an accounting major but, you don’t have to be an accounting guru for you to know how to prepare a bank reconciliation statement.

This article is written to provide a simple, yet comprehensive step by step guide on how to prepare a bank reconciliation statement without going to Harvard business school. I would like to briefly explain the fundamentals of a bank reconciliation statement so let’s start by having a quick look at what a bank reconciliation statement is.

What is a bank reconciliation statement?

A bank reconciliation statement is the product of reconciliatory process that is performed by an accounting officer in a bid to explain any difference that may exist between a company’s bank statement and its general ledger balance at a particular point in time as per cashbook or bank statement. Bank reconciliation statements are prepared on a regular and timely basis in order to spot and rectify any internal control deficiency before it escalates.

Though there are features of modern accounting software that can do bank reconciliation statements within a twinkle of an eye but everyone that work in accounting department or aspiring to work in one must be able to perform manual bank reconciliation. Two balances i.e balance as per bank and balance as per books needs to be adjusted for a full reconciliation to take place.

Accounting information systems that are designed to provide management with decision making information do its best to provide conducive atmosphere that will make the process of preparing a bank reconciliation statement a seamless one

Benefits of doing bank statement reconciliation

One the benefit of reconciling the bank statement is for control purpose. Many small businesses tend not to appreciate the importance of regularly reconciling their books and that is why fraud prevalence rate is high in smaller companies. Also time and resources are saved when bank statements are regularly reconciled with company’s account balance as any discrepancy will be highlighted and investigated at the early stage before it becomes too late and expensive to rectify.

Reasons for discrepancies between bank statement and company’s books of accounts

The most common reason for this discrepancy is due to cheques not either presented or credited to the right document. However there are other reasons like; errors, omissions, standing orders, direct debit order, service fees, timing of events, etc which we will be discussing in this article.

Process of bank reconciliation

The process of preparing a bank reconciliation statement involves making adjustments to figures on both a company’s bank statements and the general ledger with the sole aim of agreeing the bank statement with the cashbook balances.

Although not a step but the first thing that must be done is to decide on the form and format that you want your bank reconciliation statement. I strongly recommend that you create a spreadsheet template using either Microsoft Excel or a computer programming language; Python is my preferred programming language as an accountant as it gives me room to play with numbers.

Step 1

Record the ending balance of the document you wish to start with. I usually start with the bank statement figure but you can start using the cashbook figure and do the opposite of what you would do if you have started with bank statement closing balance.

Prepare a list of known deposits that are not showing on the bank statement. This will include self-service deposits made using mediums like ATMs, out-of-hour drop boxes, cheques that has not yet dropped (the technical name for this uncredited cheques) etc on the last day of the month.

Step 2

Add these items up as a subtotal then add it to the closing balance of the bank statement for the period in question. Remember that these figures will be subtracted if you had started with the company’s cashbook balance.

Step 3

Just like in step 1 above; prepare a list of all known outstanding cheques clearly including the details.

Step 4

Get a subtotal for these unpresented cheques and subtract it from the figure that you got from step 2.

Step 5

Review the bank statement for any errors like, wrongly calculated interest and excess commission charges. These errors are very rare in our today’s world but you never can tell. Deduct the overcharges and add the missing earnings. Please note that these adjustments are to be made in the company’s ledger.

Step 6

Compare the two balances to make sure that there is no more discrepancy. Go over steps 1 to 5 again if there is still any form of discrepancy to ensure that no item has been omitted.

Summary

This article on how to prepare a bank reconciliation statement started by briefly introducing the subject matter, reason for discrepancy and step-by-step approach to preparing a bank reconciliation statement.

Feel free to let me know your thoughts in the comment box below.