Introduction
A company's cash balance (as reported in the
accounting books) and their bank's cash balance (per the bank statement,
provided by the banking institution) at the end of a period normally will not
be identical. The reason for this is because there are likely to be multiple
payments and deposits in transit at all times (reconciling items), as well as
charges for banking services and other transactions.
Reconciling Items and Other Adjustments
Payments made by the company, via written checks
to vendors, employees and related, that have not been cashed by the end of the
month (outstanding checks)
will create a reconciling item, thus the company's cash balance will be lower
than their bank's cash balance.
Similarly deposits of either cash, checks or an
electronic form of payment (ATM, credit card, etc.), received from customers
for the sales of the company’s products or services that have not cleared in
the bank (deposits in transit),
will result on their bank’s cash balance being lower than the company’s cash
balance.
Usually the company becomes aware of charges for
banking services and other similar transactions (like interest earned) when
they receive the bank statement from the bank. These transactions will be
recorded by the company with a journal entry as part of the month closing
entries.
The bank reconciliation process allows comparing
and reconciling the balances that the company has registered in their cash account
(in the accounting books), with the balances that the bank provides through the
bank statement. The goal is to know and understand the differences between the
two (books and bank) and ultimately then ensure that the entity's cash records
are correct.
Matters That Could Be Encountered (During The
Reconciliation Process)
The process will also ensure that the following
inconsistencies, if present, will be identified and corrected (not an
all-inclusive list):
1. Old outstanding checks (more than six months
old).
2. Deposits in transit not cleared in the bank
within the next 1 to three days of the following month (ex. if deposited in
January 31, 20XX the deposit in transit should appeared in the banking
institution in the 1st, 2nd or 3rd of February
20XX.
3. Check(s) pertaining to other company(s) clearing
on your company’s bank statements as they might have been
erroneously deducted by the banking institution (a situation that rarely
happens).
4. Incorrect transfers (either debits or credits)
recorded on the bank statements that are not related to the company or that do
belong to the company but it was not aware of the transaction.
5. Transactions
recorded in the company’s accounting records that erroneously affect cash
account and must be corrected.
6. Banking institutions adjustments to company’s
deposits and/or checks.
Conclusion
Bank reconciliation is a fundamental part of the
company’s internal control system. It must take place shortly after the end of each
month when the bank sends the bank statement (i.e. prepared on a monthly basis),
must be documented and be reviewed by someone at a supervisor or management
level.
