Mastering Bank Reconciliation: A Step-by-Step Guide for Accounting Students

Bank reconciliation is a fundamental part of the accounting process. As an introductory concept in accounting, it plays a crucial role in ensuring that your financial records are accurate, and that your books align with the bank’s records. Understanding how to complete a bank reconciliation effectively is a skill every accountant should master, as it guarantees that no errors, fraud, or discrepancies go unnoticed.

This tutorial will guide you through the five essential steps for performing a bank reconciliation, using examples and full journal entries. By the end of this tutorial, you’ll have a clear understanding of how to reconcile a bank statement with the general ledger, and you’ll be ready to tackle practice questions to reinforce your learning.

What is Bank Reconciliation?

Bank reconciliation is the process of comparing the company’s cash records (books) with the bank’s records, typically shown in the bank statement. The goal is to identify any discrepancies and make adjustments to both the company’s books and the bank’s records. This process ensures that all transactions have been properly accounted for and that any errors are promptly corrected.

Step 1: Obtain the Bank Statement and Cash Book

Before you begin the reconciliation process, the first step is to gather all the necessary documents. These include:

• Bank Statement: This is the official record provided by the bank that details all deposits, withdrawals, and fees for a given period. It reflects the bank’s records of the company’s account.
• Cash Book (General Ledger): This is the company’s record of its cash and bank transactions, typically kept by the accounting department. It includes all cash inflows and outflows, such as receipts from customers and payments to vendors.

Example:

Let’s say that your company has a cash book that shows a balance of $5,000 as of the end of the month, while the bank statement shows a balance of $4,800.

Step 2: Compare Deposits and Withdrawals

The next step is to compare the deposits and withdrawals recorded in the company’s cash book with those in the bank statement. Look at each transaction carefully and ensure that:

• All deposits made by the company are reflected in the bank statement.
• All withdrawals or payments made by the company are reflected in the bank statement.

Tip: Sometimes, there may be timing differences, such as outstanding checks or deposits in transit, which may not appear on the bank statement yet but are already reflected in the cash book. These need to be noted during the reconciliation process.

Example:

• Deposits: The bank statement shows a deposit of $2,000 on the 10th of the month, but the company’s cash book only records $1,800 for that deposit. The company had missed recording a $200 deposit.
• Withdrawals: The company recorded a withdrawal of $500 in the cash book, but the bank statement shows a withdrawal of $550. This suggests an additional $50 in bank fees that the company did not record.

Step 3: Identify Unrecorded Transactions

After comparing the deposits and withdrawals, the next task is to identify any unrecorded transactions. These may include:

• Bank Fees: The bank may charge various fees, such as monthly service fees, overdraft fees, or transaction fees, which are not recorded in the company’s books.
• Interest Earned: If the company earns interest on its bank balance, it may not always be recorded in the company’s cash book.
• Direct Deposits: Sometimes, customers or other entities may make direct deposits into the company’s bank account, but these may not be recorded in the company’s books.

Example:

• Bank Fee: The bank statement shows a $50 service fee that the company has not recorded in its cash book.
• Interest Earned: The bank has credited the company’s account with $30 interest, but this hasn’t been noted in the company’s cash book.

Step 4: Adjust the Cash Book and Bank Statement

Once you’ve identified all discrepancies, adjustments need to be made in both the company’s cash book and the bank statement.

• Adjust the Cash Book: Any unrecorded bank fees, interest, or other transactions must be recorded in the company’s cash book. You can create journal entries to reflect these adjustments.
• Adjust the Bank Statement: If there are any errors in the bank’s records, such as mistakes in deposits or withdrawals, you should notify the bank and request an adjustment. However, most of the time, discrepancies arise from the company’s records rather than the bank’s.

Journal Entries:

Let’s consider the following adjustments:

1. Recording the Bank Fee in the Cash Book:
   • Debit: Bank Service Fees (Expense) $50
   • Credit: Bank $50
2. Recording the Interest Earned in the Cash Book:
   • Debit: Bank $30
   • Credit: Interest Income $30

Step 5: Finalize the Reconciliation

The last step is to finalize the reconciliation by ensuring that the adjusted cash book and the adjusted bank statement balances match. This means:

• Adjusted Cash Book: The cash book balance should now reflect the correct balance, including all deposits, withdrawals, fees, and interest.
• Adjusted Bank Statement: The bank statement balance should match the adjusted cash book balance, considering any outstanding transactions like deposits in transit or unprocessed checks.

Example:

• Adjusted Cash Book: After recording the $50 bank fee and $30 interest, the adjusted cash book balance is $4,980.
• Adjusted Bank Statement: The bank statement shows a balance of $4,800, but with outstanding deposits of $200 (deposits in transit), the balance is adjusted to $4,980.

Once both balances match, the bank reconciliation is complete.

Practice Questions

Now that you’ve learned the five essential steps for performing a bank reconciliation, let’s test your understanding with some practice questions.

1. Your company’s cash book shows a balance of $10,000. The bank statement shows a balance of $9,500. Upon reviewing the bank statement, you find the following discrepancies:

• A deposit of $1,500 made by the company on the 29th of the month hasn’t been recorded in the bank statement yet.
• The bank has charged a $75 service fee that has not been recorded in the cash book.
• The company has not recorded $200 in interest earned.

Required:

• Prepare the journal entries to adjust the cash book.
• Reconcile the bank statement and cash book.

2. Your cash book shows a balance of $3,200, while the bank statement shows a balance of $3,500. Upon review, you discover the following:

• A check for $600 issued by the company has not been presented to the bank yet.
• The bank statement includes a $50 charge for an overdraft fee not recorded in the cash book.

Required:

• Prepare the journal entries for the unrecorded overdraft fee.
• Reconcile the bank statement and cash book.

Answers

Question 1:

• Journal Entries:
  1. Bank Service Fee:
     • Debit: Bank Service Fees $75
     • Credit: Bank $75
  2. Interest Earned:
     • Debit: Bank $200
     • Credit: Interest Income $200
• Reconciliation:
  • Adjusted Cash Book: $10,000 – $75 + $200 = $10,125
  • Adjusted Bank Statement: $9,500 + $1,500 = $11,000, but after considering the adjustment, the cash book balance of $10,125 should match the adjusted bank statement balance.

Question 2:

• Journal Entries:
  1. Overdraft Fee:
     • Debit: Bank Service Fees $50
     • Credit: Bank $50
• Reconciliation:
  • Adjusted Cash Book: $3,200 – $50 = $3,150
  • Adjusted Bank Statement: $3,500 – $600 = $2,900, plus the outstanding check of $600, the adjusted bank balance matches the adjusted cash book balance of $3,150.

Conclusion

Bank reconciliation may seem like a tedious process at first, but it’s an essential skill for maintaining accurate financial records. By following the five key steps—obtaining the bank statement and cash book, comparing deposits and withdrawals, identifying unrecorded transactions, adjusting both the cash book and the bank statement, and finalizing the reconciliation—you ensure that your financial statements are accurate and reliable. With practice, you’ll soon be able to perform reconciliations quickly and confidently.