Bank Reconcilation
What is a Bank Reconciliation
A bank reconciliation modifies the bank statement’s balance so it is compatible with that of your records.
![br1](https://seeaccountingnow.online/wp-content/uploads/2020/04/br1.jpg)
How it Works
During the month, you record cash transactions in the business’s records.
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That is, you record cash receipts.
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And you record cash payments.
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These transactions will also appear in the bank statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br5.jpg)
The cash receipts will appear as deposits.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br6.jpg)
And the cash payments will appear as withdrawals.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br7.jpg)
If your record of transactions is correct, they should agree with the bank’s record of them.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br8.jpg)
To make sure this is the case, you check the records against one another.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br9.jpg)
In the days of manual accounting, you did this manually.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br10.jpg)
You checked your records against the bank statement — one transaction at a time.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br11.jpg)
Eventually, you would check all of your transactions.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br12.jpg)
Theoretically, if each transaction agreed, then your records should be correct.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br13.jpg)
The problem was it was very easy to make a mistake while checking your records.
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You may have ticked something as being correct.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br15.jpg)
But the transaction was not correct, at all.
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So after checking individual transactions, you need to double check your work.
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You do this by comparing balances.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br18.jpg)
If the records are identical, the closing balances should be identical, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br19.jpg)
More often than not, though, the balances will not agree.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br20.jpg)
Reasons Balances Don’t Agree
Bank Charges
The bank statement will show a withdrawal for bank charges.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br21.jpg)
As this is the first you know of them, your records won’t show a corresponding cash payment.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br22.jpg)
So you need to record bank charges in your records.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br23.jpg)
Having made the corrections, you compare balances again.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br24.jpg)
Deposits in Transit
If balances still don’t agree, the reason could be that your records show a cash receipt.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br25.jpg)
But the bank statement doesn’t show a corresponding deposit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br26.jpg)
The reason for this was that the business deposited money late in the month.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br27.jpg)
But the bank had already prepared your statement by then.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br28.jpg)
So when your statement arrives, it won’t show the deposit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br29.jpg)
In this case, the deposit is known as a deposit outstanding or deposit in transit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br30.jpg)
Unpresented Checks
Another reason the balances may not agree is because your records show a cash payment.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br31.jpg)
But the bank statement doesn’t show a corresponding withdrawal.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br32.jpg)
The reason for this is the business paid for something with a check.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br33.jpg)
But the check’s recipient is yet to present the check to the bank for payment when the statement was prepared.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br34.jpg)
In this case, the check is known as an un-presented check.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br35.jpg)
Bank Reconciliation
Recapping – Showing the Process a Different Way
When checking your records, you compare one to the other.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br36.jpg)
You take your record of cash receipts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br37.jpg)
And you check it against the bank’s record of deposits.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br38.jpg)
At the same time, you take your record of cash payments.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br39.jpg)
And you check it against the bank’s record of withdrawals.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br40.jpg)
After checking transactions, you compare balances.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br41.jpg)
Here, you are making sure the balances are the same.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br42.jpg)
If the balances are the same, it shows all the transactions must be the same, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br43.jpg)
The problem is, the bank statement may not contain all the transactions yours do.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br44.jpg)
There may be deposits in transit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br45.jpg)
Or there may be un-presented checks.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br46.jpg)
Because it is missing transactions, the bank statement’s balance is incompatible with that of your records.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br47.jpg)
For the balances to be compatible, the bank statement’s balance needs to include all the transactions shown in your records.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br48.jpg)
It needs to include all the cash receipts your records show.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br49.jpg)
And it needs to include all the cash payments your records show.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br50.jpg)
Only then will the balances of the two records be compatible.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br51.jpg)
Preparing a Bank Reconciliation
For comparison to be possible, you need to modify the bank statement’s balance.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br52.jpg)
To do this, you prepare a bank reconciliation.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br53.jpg)
With a bank reconciliation, you modify the bank statement’s existing balance.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/br54.jpg)
So you take the existing balance.
![br55](https://seeaccountingnow.online/wp-content/uploads/2021/06/br55.jpg)
Next, you add any deposits in transit to that balance.
![br56](https://seeaccountingnow.online/wp-content/uploads/2021/06/br56.jpg)
This increases the statement’s balance.
![br57](https://seeaccountingnow.online/wp-content/uploads/2020/06/br57.jpg)
Then you deduct any unpresented checks from the statement’s balance.
![br58](https://seeaccountingnow.online/wp-content/uploads/2021/06/br58.jpg)
This decreases the statement’s balance.
![br59](https://seeaccountingnow.online/wp-content/uploads/2020/06/br59.jpg)
When complete, the reconciliation will show the adjusted balance.
![br60](https://seeaccountingnow.online/wp-content/uploads/2021/06/br60.jpg)
This adjusted balance should be compatible with your records.
![br61](https://seeaccountingnow.online/wp-content/uploads/2020/06/br61.jpg)
© R.J. Hickman 2020