What Are the 5 steps for Bank Reconciliation? (Guidance)

The Bank reconciliation process involves comparing internal and external bank records to ensure that all the transactions have been properly recorded.

The primitive reason to do a stringent bank reconciliation process is to ensure that there is no discrepancy between actual and recorded transactions.

Two main documents are required during the bank reconciliation process. They include the internal bank records of the company (the cash book) and the Bank Statement of the company.

In this regard, it is imperative to consider the fact that bank reconciliation tends to be carried out at the end of the year, once all the year-end balances have been tabulated, and the relevant bank statements have been processed and received by the company.

Bank Reconciliation in itself is a two-way street. This implies that both internal statements and the statement received by the bank need to be checked and verified by the company.

Therefore, there are a few steps that need to be carried out in order to ensure that proper bank reconciliation has been carried out.

Main components of Bank Reconciliation

There are three main components for bank reconciliation. They are as follows:

Unrecorded Expenses: These are instances where the company does not record certain expenses, but they have been directly deducted from the organization’s bank balance.

Examples of unrecorded expenses are as follows:

  • Insufficient funds: This comprises the fees charged on accounts that do not meet a minimum balance requirement. Instead, the bank might charge a certain amount of money as a penalty. This can only be identified once bank statements have been received from the bank.
  • Printing Fees: Some banks charge printing and courier fees when they print and dispatch the bank statements. This can only be verified once the bank statements have been processed.
  • Service Fee: This comprises bank charges for items like checkbooks, deposit processing, direct deposit payments, and other miscellaneous services that the organization might have subscribed to.  
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Represented Checks: Unpresented checks are checks issued by the company but not yet presented by the concerned party. This might occur because of two main reasons:

  • Insufficient funds: The account might not have sufficient funds to process the payment on the check.
  • Inability of the concerned party to present the check to the bank

Uncredited Deposits: This mainly comprises the amounts that the company thinks it has already received, but are still in transit. Examples include deposits in transit and amounts not duly received by the company.

5 Steps for Bank Reconciliation

The 5 steps for bank reconciliation are given below:

1) Inspection of internal banking records

Even though internal controls are present within the company, it is not an infrequent instance where some of the transactions are not properly recorded or are recorded more than once.

Therefore, at the end of the year, processes must be completed to ensure that all transactions have been properly recorded in the company’s records.

This is mainly an internal verification tool, which helps to verify that there has been no discrepancy in recording the relevant transactions.

2) Accessing the Bank Statements

Once there is reasonable assurance that there has been no internal discrepancy in recording and managing the cash book, the next step tends to be to ensure that bank statements are also inspected to check for any transactions that exist in the bank statements, but not in the internal records of the company.

Usually, certain transactions are mentioned in the bank statement and automatically deducted from the balance.

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The company’s cashier (or the bookkeeper) does not know of these transactions unless they appear in the bank statement.

Examples include bank charges and other standing charges that are concurrently deducted from the balance.

Once a bank statement from the bank is accessed, accountants need to check for these transactions, and note them down as transactions that appear on the bank statement, but not in the cash book itself.

All these transactions need to be duly recorded to be reconciled when preparing the relevant bank reconciliation statement.

3) Checking for uncredited deposits and unpresented checks

The process of bank reconciliation in itself involves two main entries, uncredited deposits, and unpresented checks. The details of both are given below:

  • Uncredited Deposits: These are the checks that have been deposited by the company, but have not yet been credited by the bank. This might be due to a timeline difference, or an error on part of the bank. It is important to ensure that uncredited deposits are properly recorded in the company so that these transactions can be reported to the bank or adjusted in the company’s bank statements.
  • Unpresented checks: Unpresented checks are defined as checks that have been issued by the company, but are not yet presented at the bank by the bearer. Once the check was issued, the amount was debited in the company’s accounts. However, since they were never presented in the bank itself, they are not reflected in the bank statement. These unpresented checks also need to be adjusted during the bank reconciliation process in order to ensure that both, the bank statement, as well as balance on the cash book is reconciled at the same level.
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4) Drafting a bank reconciliation statement

Drafting a bank reconciliation statement is basically the crux of the process since it properly identifies the transactions required to bring both balances to the same threshold.

Therefore, the following entries are made, in order to reconcile both the balances:

ParticularsAmount
Balance as per Bank Statementxxxx
Add: Unpresented Checksxxxx
Add: Bank Chargesxxxx
Less: Uncredited Deposits(xxxx)
Balance as per Cash Bookxxxx

Alternatively, this can also be worked out the other way around. This is illustrated as follows:

ParticularsAmount
Balance as per Cash Bookxxxx
Less: Unpresented Checks(xxxx)
Less: Bank Charges(xxxx)
Add: Uncredited Depositsxxxx
Balance as per Bank Statementxxxx

5) Finalizing and reconciling the difference

The last step during the bank reconciliation process requires accountants to ensure that all differences between the cash book and the bank statement are logically verified to eliminate any chance or error in the latter part of the business.

In this regard, it is highly important to establish proper communication channels, so that companies are able to communicate with the bank, and settle any differences.

There are certain cases where bank charges are doubled, or some entries have been incorrectly recorded because of a technical issue at the bank’s end.

All these issues must be conveyed to the bank in due time so that the year-ending balance is free from any kind of discrepancy.

Therefore, it can be seen that bank reconciliation comprises several different steps and components that need to be accounted for when reconciling differently.

The concept of materiality also comes into play when drafting bank reconciliation statements.

There might be circumstances where differences between the bank statement and cash book are insignificant (or immaterial).

In these cases, bank reconciliation might not necessarily be drawn since it is a relatively immaterial difference.

However, this does not rule out the need to consider both, uncredited deposits as well as unpresented checks.