Bank Reconciliations form part of Internal Control. The purpose of internal control is to ensure that the balance of cash and other company assets are secure and reliable.
Methods of control include:
Segregation of duties
Taking Physical Inventory
Bank Reconciliations
Performing a bank reconciliation involves comparing the bank statement to the general ledger (G/L). Differences between the bank statements and the G/L arise from either errors or timing differences. Bank reconciliations are usually performed at the end of each month - where we reconcile our bank statements with the Cash account in the G/L. We do this to ensure that our cash account amounts in our bank statements match what we have in our books.
The G/L will often not match the Bank Statements because there will be deposits/payments in transit (timing differences), there may be mistakes where people have paid us a slightly different amount than they owe us, and there may be errors. These require adjustments when we do the bank reconciliation.
Our treatment for the different categories of errors and timing differences can be found, below.
Errors:
G/L Cash balance: Use adjusting journal entries to correct the G/L
Bank Statement: Inform the bank of the error and correct the reconciliation on bank side.
Timing Differences:
Recorded in G/L but not yet in Bank Statement: Correct the reconciliation on bank side.
Recorded in Bank Reconciliation but not in G/L: Use adjusting journal entries to correct G/L.
How to Perform a Bank Reconciliation:
The easiest way to learn about how to perform a bank reconciliation is to review an illustrative example.
But before we do - here are a few tips:
1. Always start the reconciliation with the bank balance as per the bank statement.
2. The bank statement will show the opposite Dr/Cr to the company’s G/L. This is because it is shown from the bank’s perspective. If the bank statement shows an overdraft (Dr. balance), the bank reconciliation should continue as normal, but starting with a negative.
3. Note that when doing reconciliations, we should always state our assumptions. For example, we often assume that transcription errors are made in the G/L and not in the bank statement, since it is more likely that humans have made a transcription error when entering the transaction in the G/L. In an examination scenario - we should state this assumption. In real life, we should double check the original transaction documentation (receipts, etc...)
A sample bank reconciliation can be found, below. We simply match the transactions between the bank balance and the G/L (crossed out), and make note of any differences between them (circled in red). Once we have noted all differences, we either make corrections or adjustments - as seen in points 1-3, below.
It's very important to perform bank reconciliations because we use the numbers from the Reconciled G/L to create our Financial Statements, and not the Reconciled Bank Statement.
Checks that Expire (a.k.a. Stale Dated):
If a check is stale dated and no longer valid, it should be recorded back to the cash account.
Step 1:
Record the cash back into the G/L.
Once it is written back into the Cash account, the check should be removed from the bank reconciliation balance - the G/L Reconciliation - until such a point as a new check is issued.
If we have not made the Cash adjustment in our General Ledger (as in Step 1, above), then we must keep the check amount in the reconciliation for future bank/G/L reconciliations until we finally adjust for the stale-dated check in our G/L.
Step 2:
When a new check is issued, the entity can record the following journal entry:
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