What Is a Bank Rec

Bank Reconciliations are one of the most important internal controls of any organization.  CPA’s are trained in school and on the job on how to do a proper bank reconciliation.  Their bosses may not be as familiar with bank reconciliations and their importance. In this blog, I will offer a bit of a primer on some basics of completing a proper and detailed bank reconciliation.

A bank reconciliation is a process undertaken by a company to ensure that the bank transactions recorded in the company’s accounting records, or general ledger. are complete and accurate. To achieve this goal, the financial team compares the company’s recorded bank transactions in the general ledger with the transactions shown in the bank statement which is received from the company’s bank. If and when differences between the records appear, the variations must be justified or “reconciled”. When the team reaches a point at which there are no unjustified (unexplained) differences, the bank statement is considered reconciled.

Said another way, bank reconciliations compare the bank balance per the “books” (accounting records, general ledger) to the bank balance per the “bank” (the records of the bank as shown on the monthly bank statements received from the bank).

When preparing for a detailed bank reconciliation there are several adjustments that should be made to the month-end balance per the bank statement:

• Deduct outstanding cheques or payments – Cheques or payments that have been recorded in the general ledger but have not yet been recorded on the bank statement due to the delay in time it takes for these items to be presented and cleared through the banking system and to appear on the bank statement.
• Add outstanding deposits – deposits that have been recorded in the general ledger but have not yet been deposited in the bank and do not appear on the bank statement.

When preparing for a detailed bank reconciliation there are several adjustments that should be made to the month-end balance per the general ledger.

• Deduct unrecorded payments – Charges, payments, expenses, transfers that are shown coming out of the bank per the bank statement but have not been recorded in the general ledger
• Add unrecorded deposits – deposits that are shown as being deposited into the bank per the bank statement but have not been recorded in the general ledger
• These items could be recorded as reconciling items on the bank reconciliation, but the preferred approach is to make the accounting entries to record these items in the general ledger immediately and then complete the bank reconciliation after those entries are made.

The following is a simple numerical example of a “reconciled” bank reconciliation.

Month-end balance per bank statement	$19,645.23
Less: outstanding cheques (recorded in general ledger but have not cleared the bank yet and have not appeared on the bank statement)
Cheque 142	-$120.13
Cheque 153	-$450.00
Add: outstanding deposits (recorded in general ledger but not yet deposited in bank and/or do not appear on the bank statement)
Deposit – Friday	+$1,200.00
Adjusted balance per bank statement (A)	$20,275.10
Bank Balance per general ledger (B)	$20,275.10
Unreconciled differences between A and B	Zero

In my next blog, I will talk a bit more about why bank reconciliations are so important and why both financial leaders and their bosses need to ensure that they are done on a timely basis and are done properly.  I will also discuss some situations where bank reconciliations were not being done properly and the issues that resulted. In the meantime, please never hesitate to contact TCOBI if questions arise or if your company could benefit from experienced, professional support in setting up your bank reconciliation process.