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

The Bank reconciliation process involves comparing internal, as well as external bank records in order 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 the actual transactions and the recorded transactions.

There are two main documents that 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, as well as 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 certain expenses are not recorded by the company, but they have been directly deducted from the bank balance of the organization. Examples of unrecorded expenses are as follows:

  • Insufficient funds: This comprises of the fees that is charged on accounts that do not meet a minimum balance requirement. In lieu of this, 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 fee when they print and dispatch the bank statements. This can only be verified once the bank statements have been processed.
  • Service Fee: This comprises of bank charges for items like check books, deposit processing, direct deposit payments, as well as other miscellaneous services that the organization might have subscribed to.  
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Unpresented Checks: Unpresented checks are checks that have been issued by the company but are 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 of the amounts that the company thinks it has already received, but they 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

Regardless of the fact that there are internal controls present within the company, yet it is not an infrequent instance where some of the transactions are not properly recorded, or they are recorded more than once.

Therefore, at the end of the year, there is a need to complete processes to ensure that all transactions have been properly recorded in the records of the company. 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.

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Usually, there are certain transactions that are mentioned in the bank statement, and they are automatically deducted from the balance. The cashier (or the bookkeeper) of the company 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 so that they can 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 bank statements of the company.
  • 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 accounts of the company. 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, 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 bank reconciliation statement 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:

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:

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 that might exist between the cash book and the bank statement are logically verified in order 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 to 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 need to be conveyed to the bank in due time so that the year ending balance is free from any kind of discrepancy, whatsoever.

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.  

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