Preparation of Bank Reconciliation Statement

Bank reconciliation may not be glamorous, but it is vital. Anyone in business must know how to prepare a bank reconciliation statement (BRS). The BRS ensures that the cash balance in your books aligns with what the bank says you have. If there is a discrepancy, it could be due to timing differences, errors, or even fraud. Let’s dive into the nitty-gritty of preparing a bank reconciliation statement.

What is a Bank Reconciliation Statement (BRS)?

A bank reconciliation statement compares your accounting records to your bank statement. It helps you find why the balances may not match. It also finds changes needed in your books to match the bank’s records. You should match the ending balances after settling all items for the best outcome.

Why is bank reconciliation important?

Bank reconciliation does more than confirm your balances. It’s a powerful tool for:

·         You or the bank may make errors that you need to detect.

·         Identifying unauthorized or fraudulent transactions.

·         Making certain that every transaction is properly documented

·         Maintaining a clear picture of your cash flow, which aids in better decision-making.

Skipping this process means you have incomplete information. It can lead to bad decisions and financial problems later.

How to prepare for a Bank reconciliation statement?

1. Compare cash book and bank statement

First, compare the cash book’s bank column with the bank statement. Differences may arise from uncredited or unpresented checks from a previous period. Identifying these differences helps you understand why the balances do not match.

2. Tick Off Matching Transactions

Compare the bank statement’s credit side with the cash book’s debit side. Then, compare the bank statement’s debit side with the cash book’s credit side. Mark (tick) all items that appear in both records. It ensures that transactions are correct and finds any discrepancies.

3. Analyze Missed Entries

Check the bank column of the cash book and the passbook for entries not posted in the cash book. Find any unrecorded transactions in the cash book. This includes bank charges and direct debits. List these entries to make the necessary adjustments.

4. Correct errors in the cash book

Review and correct any mistakes or errors found in the cash book. It is vital. It ensures the cash book shows an accurate financial position. Corrections could involve fixing incorrect amounts or missing entries.

5. Calculate Revised Cash Book Balance

After making corrections, calculate the new balance of the cash book’s bank column. This revised balance will be the BRS’s starting point. It reflects the accurate amount after adjustments.

6. Start the bank reconciliation statement.

Begin the BRS with the updated cash book balance. It lays the groundwork for reconciling the cash book with the bank statement.

7. Adjust for Un-Presented and Un-Credited Cheques

Add unpresented cheques to the cash book balance. Deduct uncredited cheques. This change accounts for timing differences in the cash book and bank statement.

8. Make adjustments for bank errors.

Adjust for any errors made by the bank. If the BRS starts with a debit balance from the cash book, include amounts that the bank credited by mistake. Subtract the amounts that someone debited in error. Do the reverse if starting with a credit balance. This process ensures that your records and the bank’s match. They will reflect the true financial position after fixing any bank errors.

9. Final Reconciliation

The final figure should equal the balance as per the bank statement. This confirms that we have resolved all discrepancies. The records now match.

Questions to Understand your ability

Que.1 Why is bank reconciliation such a big deal?

A. It’s just a routine to confirm bank charges

B. To match your records with the bank’s and spot any mistakes or fraud

C. To make the bank aware of your financial position

D. To calculate your monthly expenses accurately

Que.2 When you’re checking for missed entries, what exactly are you looking for?

A. Cheques you forgot to issue

B. Transactions that show up in the bank statement but are missing from your cash book, like bank charges or direct debits

C. Mistakes made by the bank

D. Interest credited by the bank

Que.3 Once you fix errors in the cash book, what’s your next move?

A. Finalize the bank reconciliation statement

B. Re-calculate the cash book’s balance to see the adjusted figure

C. Look for un-presented cheques

D. Check if all receipts are recorded correctly

Que.4 When handling un-presented and un-credited cheques, what adjustments should you make?

A. Add un-presented cheques and subtract un-credited ones to align the cash book with the bank statement

B. Subtract un-presented cheques and ignore un-credited ones

C. Add both un-presented and un-credited cheques

D. Ignore both, as they don’t affect reconciliation

Que.5 How do you know your reconciliation process is complete?

A. The cash book balance and bank statement balance match up

B. All outstanding cheques are cashed

C. You’ve reviewed every transaction for the month

D. The bank acknowledges your balance as accurate

Conclusion

Bank reconciliation is very crucial in managing the accuracy of the organizational financial records, hence the importance of preparing the bank reconciliation statements. Ensure your company’s cash book is up to date by following appropriate steps. When using bank reconciliation, you need to balance records, identify transactions that may be recorded but not reflected, make allowances for differences in methods of recording transactions, and rectify errors. It shows your cash flow. You can make better monetary decisions; this will help to grow and even maintain the health of the business.