A financial institution’s general account ledger contains a statement of the transactions that involve its checking account. The financial institution or bank also generates a record of the company's checking account when it processes the company's checks, service charges, and other details. The bank statement lists the activity within the bank account during the recent month as well as the balance in the bank account. After every month, the financial institution mails a bank statement to the company.
The company should then confirm that the amounts on the bank statement is consistent with the amounts in the company's Cash account in its general account ledger and vice versa. This process of confirming the amounts is referred to as reconciling the bank statement or bank reconciliation. The benefit of reconciling the bank statement is knowing that the amount of Cash reported by the company is consistent with the amount of cash shown in the bank's records. Since most companies write several checks each month and make many deposits, reconciling the amounts on the company's books with the amounts on the bank statement can be time consuming. This process is difficult because some transactions can appear in the company's account on one month, but show up on the bank statement in a different month. As an example, checks written near the end of one month are deducted immediately on the company's books, but those checks will likely clear the bank account in the next month. From this example, it can be understood why there will likely be a difference in the balance on the bank statement vs. the balance in the Cash account on the company's books. It is also probable that neither balance is the true balance. Both balances may need adjustment in order to report the true amount of cash.
When adjusting the ending balance to be the true balance and after you adjust the amount in the general Cash ledger to also be the same true balance, you have reconciled the bank statement.
Comparing the Bank Statement to the Cash
When you compare the bank statement to the cash you must reconcile the cash book, compare the transactions, make the necessary corrections and ensure that the accounts report the same amount of cash. Reconciling the cash book is essential to knowing the business's true cash amount.
Measure up the transactions between the cash book and the bank statement. Mark off each corresponding transaction to distinguish which transactions do not appear on both statements. Assess the adjusted bank statement balance. Included the deposits that have not posted to the bank account. Subtract the checks that do not appear on the bank statement and any bank errors, which can include incorrect debits or credits. Assess the adjusted cash book balance and subtract any bank fees (non-sufficient funds, etc.), listed on the bank statement. You must add interest earned, direct deposits from customer receivable and collected by the bank, then adjust any errors in the cash book. Review the adjusted bank statement balance to the adjusted cash book balance, which should be equal. If the accounts do not correspond with each other you must repeat the process.
How to Perform a Bank Reconciliation
The first step in performing a bank reconciliation is to obtain a bank account and a cash book or ledger. Next, you must adjust the balance on the bank statement to the true, adjusted, or corrected balance. Deposits in transit are amounts received and recorded by the company, but are not yet recorded by the bank. Since deposits in transit are already included in the company's Cash account, there is no need to adjust the company's records. Nonetheless, deposits in transit are not yet