Bank Reconciliation Discrepancies: Common Causes and Steps for Identification

Bank reconciliation is one of the major tasks that looks boring for most of us. Discrepancies occur in the event of not matching the transactions between bank statements and the cash book of the company. Comparing both of these statements by regular reconciliation will avoid the problems at the time of audit and tax filing. This guide will deliver information regarding the most common reasons for the occurrence of discrepancies and how to identify them before further problems.

What’s a Bank Reconciliation Discrepancy?

A bank reconciliation discrepancy occurs when the balance of any company’s accounting records (i.e., cash book or ledger) is mismatched with the bank statement of that company. This unalignment can take place because of several reasons, like time-lack, errors, or malpractices that result in the fraud. Finding these discrepancies becomes essential, and these can be handled through maintaining accuracy in finances.

Common Causes of Discrepancies in Bank Reconciliation

Let’s get to the root of the problem. Here are some of the main reasons why your numbers might not be adding up:

Outstanding Checks: These are checks you’ve written, but the bank hasn’t processed yet. They’re recorded in your books but not reflected in the bank statement. This is one of the most common timing issues.

Deposits in Transit: This is when you’ve recorded a deposit, but the bank hasn’t processed it yet. It’s like the outstanding checks, except in reverse.

Bank Fees and Charges: Banks charge for all kinds of things—service fees, overdraft penalties, wire transfers, you name it. If you forget to account for these in your books, it can throw off your reconciliation.

Data Entry Errors: Sometimes errors occur due to typing the wrong amount, recording the wrong date, or someone entering any transaction twice. These small errors can lead to more problems.

Interest or Bank Credits: Your account may occasionally receive additional funds from the bank in the form of interest or cashback incentives. These will cause a disparity if you haven’t noted them in your books.

Fraudulent Transactions: Occasionally, you might spot transactions you don’t recognize. If these aren’t a result of your error, it could mean fraud. Regular reconciliation can help you catch these fast.

Step-by-Step Guide to Identifying Discrepancies in Bank Reconciliation

This is a simple, step-by-step method for identifying differences.

Gather Your Documents

First things first: obtain the cash book (also known as the ledger) and the bank statement. Ensure that they span the same amount of time. To look for any persistent problems, it might occasionally be helpful to have the statement from the prior month.

Check the Opening and Closing Balances

Start with the basics. Compare the opening balance on the bank statement to the closing balance of the previous period in your books. If these don’t match, you’re probably dealing with an old discrepancy that hasn’t been resolved.

Review Outstanding Checks and Deposits in Transit

Look at the list of outstanding checks in your books and match them with the bank statement. Any check that hasn’t cleared by the end of the bank statement period is considered outstanding. Do the same for deposits in transit. This is usually the main reason for temporary mismatches and often resolves itself in the next cycle.

Scan for Bank Fees and Charges

Banks love their fees. Check the bank statement for any charges, like service fees, overdraft penalties, or transfer costs. If they’re missing from your records, add them to your cash book.

Record Interest and Bank Credits

Sometimes, banks add money to your account without you even asking. This could be interest, cashback, or some other type of credit. Make sure these amounts are recorded in your books. If they’re missing, you’ll have a mismatch.

Double-Check for Data Entry Errors

Examine each transaction to ensure that it precisely matches the bank statement. Seek out items like as:

·         Numbers that are switched around (e.g., entering Rs.65 instead of Rs.56)

·         Dates that don’t match

·         Duplicate entries

·         Missing transactions

Data entry errors are one of the most common causes of discrepancies, and they’re also some of the easiest to fix—once you find them.

Investigate for Fraud or Unauthorized Transactions

Discrepancies can occasionally be more than just mistakes. A transaction you don’t recognize can be an indication of fraud. Any unusual activity should be reported immediately to your bank, and it should be monitored throughout subsequent reconciliations.

Recalculate and Adjust

Make the necessary adjustments to your cash book when you’ve determined all the discrepancies. Fees, unpaid checks, transportation deposits, and any additional modifications you discovered should all be added or subtracted. The number on your bank account and the adjusted balance in your cash book should match after you’re finished.

Keep a Record of the Reconciliation

Don’t simply complete the reconciliation and move on. Keep a record of everything, including the changes you made, the reasons behind them, and any unexpected discoveries. This document will assist you the next month and demonstrate your financial responsibility.

Tips to Avoid Future Discrepancies

To make your life easier, try these best practices:

Reconcile Monthly: Avoid allowing disparities to accumulate. Finding and resolving problems is made simpler with monthly reconciliations.

Use Accounting Software: Much of the job may be automated by software, which streamlines the process and lowers data entry mistakes.

Be Quick with Bank Statements: As soon as you receive your bank statement, review it. Early fault detection is far simpler than attempting to resolve a year’s worth of inconsistencies at once.

Set Up Internal Controls: Make sure you have systems in place for checking transactions, especially if multiple people are handling the books. This can help prevent both errors and fraud.

Questions to Understand your ability

Que.1 What does a “bank reconciliation discrepancy” mean?

A. Your bank statement balance and your records don’t match up.

B. The bank forgot to charge fees.

C. Both bank and book balances are exactly the same.

D. The bank didn’t send a statement.

Que.2 Which of these often causes a mismatch in bank reconciliation?

A. Just having a high number of transactions

B. Checks that you issued but haven’t cleared yet

C. The balances are the same

D. Interest credited by your accountant

Que.3 If you spot a transaction you don’t recognize in your reconciliation, what should you do?

A. Ignore it and move on

B. Contact the bank and dig deeper

C. Adjust your records to match the bank statement without checking further

D. Assume it’ll fix itself next month

Que.4 Which of these is a classic example of a data entry mistake?

A. Checks that haven’t cleared

B. Deposits in transit

C. Mixing up numbers, like typing Rs.98 instead of Rs.89

D. Interest not posted by the bank

Que.5 To find discrepancies early how frequently is required to reconcile the bank statement?

A. Once a year

B. Every month

C. Every five years

D. Only when you think there’s a mistake

Conclusion

Bank reconciliation might not be glamorous, but it’s one of the best ways to keep your finances in check. Discrepancies can come from a lot of different places, from unprocessed checks to simple mistakes or even fraud. But if you go through this process step-by-step, you’ll find the issue, fix it, and keep your books balanced.