Just like it is pertinent to match the assets and liabilities side of a balance sheet, balancing the cash in a company’s accounting records and in the bank statement is also necessary. Due to time lags or operational errors, the propensity of a mismatch between the two rises. This is not uncommon; however it must be dealt with promptly and can be done so with the help of a Bank Reconciliation Statement.
Understanding bank reconciliation statement:
A Bank Reconciliation Statement, as the one shown below, assists the company or individual in matching the individual cash account balances to the respective bank’s records. This task is accomplished by re-evaluating the balances in both records. As far as the bank balance is concerned, the current recorded amount is taken as the base value and subsequently all deposits in transit are added to it.
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Moreover, any outstanding cheques issued, within the certain specified time frame, are deducted to arrive at an adjusted bank balance. Deposits in transit and outstanding cheques are those transactions that took place at a time after the issuance of the bank balance but before the accounting of the company records.
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Creating bank reconciliation statement:
The ultimate aim is to match this adjusted bank balance to the adjusted book balance. This adjustment is thus followed by the adjustment of the balance in the books. All income received, including interest income, and any receivables, are added back to this balance. If some deposit is understated, that is also added back to the initial book balance. Subsequently, any applicable bank service fees or NSF checks are deducted to arrive at the adjusted bank balance in books.
Reaffirming the previous statement, the main cause of this discrepancy is the time lag involved. Some transactions, such as the recording of any deposits, cheques, or any fees charged may be recorded relatively earlier by one party and relatively late by the other, as mentioned earlier. Moreover, there are operational or bank errors also. If the system fails to record a particular entry, it will lead to discrepancies among the balances.
This is a template of a bank reconciliation report. It calls for recording of the individual transactions and subsequently making adjustments to the current bank balance. This amount and the company’s adjusted balance as per its accounting records must match in order to remove all discrepancies.