Bookkeeping
Cash Management – Bank Reconciliation
Posted by Iris Perez
onOctober 31, 2024
Majority of the businesses ranging from small and medium to big enterprises have their own bank account to which they deposit the business’ cash. All transactions affecting the bank account are being recorded by the bank, this includes withdrawals, deposits, transfers, service charges and others.
Bank statement is the document provided by the bank which shows a record of financial transactions that occurred at a period. Usually in opening a bank account, there are options on how the bank will send you the statements, whether by electronic mail or through hard copy. You can request for hard copy of statements through formal request and by going to the bank.
Banks nowadays offer an online or paperless transaction for your banking needs – one of which is the electronic generation of bank statements that comes in PDF (portable document format).
Bank Reconciliation
While the bank keeps a record of all the account’s bank transactions, it is important that the company has also their own record as well, and these two records should match each other. However, in some instances, the cash per bank and the cash per book does not always have the same ending balances. By not having the same ending balance, it does not mean that one record is wrong, it could be because of some reconciling items.
In order to settle the difference of account balances between these two records, a bank reconciliation is being done.
Bank reconciliation is the process of bringing together the transactions as recorded in the company books and the transactions as recorded by the bank into agreement. This is usually done on a monthly basis. Adjusting entries must be done in order to reflect the true value of cash in bank.
In rare cases, some discrepancies occur which is out of control of the depositor, these are bank errors which are later corrected by the bank itself and the depositor has no position to correct the error.
Reconciling items
Reconciling items are items which reflects the differences between balance per book and balance per bank. Below are some of the usual reconciling items:
Deposit in Transit – These are deposits made to the bank account which are not yet recorded by the bank. This happens when the amount is deposited after the bank cut-off or is waiting for clearing. Example for this is when you deposit a check on July 31 at 4pm and the bank cut-off is only until 3pm, the deposit will not be cleared on that day and will be reflected on the following day or after clearing in a few days.
In this example, the company has already recorded the deposit however it still hasn’t appeared on the bank statement for the month of July.
Take note that the cut off time varies for every bank; you may contact your bank to enquire their cut-off time.
Outstanding Checks – These are checks issued by the account holder to the recipient but are not yet presented to the bank. Although the company have already recorded the payment, the bank on the other hand are not yet aware of the payment made as it has not been presented for encashment or deposit.
Debit Memos – These are items in the company’s bank account that causes a decrease in the account balance. These usually includes the following:
- Service Charges – These are fees charged by the bank for the service they have rendered. These are automatically debited or deducted from the account balance. It is best to check the bank statements regularly to be aware of these charges.
- NSF Checks – NSF stands for No Sufficient Funds Check. This happens when the company receives checks from the customers but is dishonored and returned by the bank upon deposit because the customer’s account lacks fund. The bank debits back the amount previously recorded as an increase. The discrepancy occurs when the company records the increase of cash due to receipt of check, when in fact, the check was not cleared by the bank and was debited back to the account.
Credit Memos – These are items in the company’s bank account that causes an increase in the account balance. These includes the following:
- Proceeds of Loans – These are bank loans that were credited directly to the account upon issuance.
- Interest Income – Interest you earned on the deposit of an interest-bearing deposits.
- Collections from customers – This are payments from customers that are deposited directly to the company’s bank account. It may also be bank to bank transfer from customer.
Bank Error – An example of this is a bank deposit on another bank account which was mistakenly recorded on the company’s bank account. This error is later be adjusted by the bank itself.
Book error – Theses are error in the company’s books, this includes omitted record, transposition of amounts or incorrect usage of ledger account.
Bank Reconciliation Method
There are 3 methods of bank reconciliation as follows:
Bank to Book reconciliation – Using this method, reconciling items are added or deducted from the bank balance to arrive at the book balance. Below is an example:
Book to bank Reconciliation – This is the opposite of the first method. The reconciliation begins with the ending balance per book, reconciling items are then added or deducted to arrive at the ending balance per bank. Below is an example of this method:
Adjusted Balance Method – The most commonly practiced bank reconciliation is the adjusted balance method wherein the book and the bank balance are both adjusted to arrive at the true amount of cash. Here is an example:
Bank Reconciliation is important to ensure that the company’s record is accurate and safeguarding cash by early detection of fraud and error. It is best to do this regularly, at least every after the end of each month. If you are unsure, you may contact an accountant or bookkeeper to help you with it.
Tags:
Bookkeeping, Bank, Reconciliation, Accountable ph
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