Bank Reconciliation Essay

Submitted By sries2010
Words: 946
Pages: 4

Bank Reconciliation

Bank reconciliation is a process that explains the difference between the bank balance shown in a company’s bank statement, as supplied by the bank and the corresponding amount shown in the company’s own account records at a particular point in time.
Such differences may occur, for example, because a cheque or a list of cheques issued by the company have not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded In the company’s books, or either the bank or the company itself has made an error.
It may be easy to reconcile the difference by looking at very recent transactions in either the bank statement or the company’s own accounting records (cash book)and seeing if some combination of them tallies with the difference to be explained. Otherwise it may be necessary to go through and match every single transaction in both sets of records since the last reconciliation, and see what transactions remain unmatched. The necessary adjustments should then be made in the cash book, or any timing differences recorded to assist with future reconciliations.
For this reason, and to minimize the amount of work involved, it is good practice to carry out such reconciliations at reasonably frequent intervals. Reconciliations are generally performed by specialized accounting software though the understanding of what occurs is important for a successful reconciliation.
Here are some of the abbreviations that are used on a typical bank statement: * DO = Debit Order * SO = Stop Order * IS = Insurance * SF = Service Fees * SD = Sundry Debits * EC = Error Correction * IN = Interest * CB = Cheque Book * CM = Cheque marked for payment * RD = Return to drawer * DB = Debit Balance * OD = In Overdraft
Bank reconciliation is an internal control that ensures that the cash in its accounts equals what it has recorded in its books. Due to the amount of time between when a bank statement is prepared and when it is received by a business, the document may not accurately reveal what the business actually has in terms of cash. This is why reconciling the bank statement is necessary.
It consists of a book balance column and a bank balance column. One column is adjusted by adding all of the legitimate transactions that either the bank statement or books do not show. The reconciliation is complete when the two columns equal each other. When a legitimate transaction that was not recorded in the books is discovered it must be added by recording a journal entry. The person reconciling the accounts then adjusts one column by adding deposits that had not yet been recorded and subtracting check and other outlays that had not yet been cashed when the statement had been prepared. The reconciliation is not complete until the adjusted column equals the unadjusted column.
Journal Entries
A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total o the credits or the journal entry is said to be “unbalanced”. Journal entries can record unique items or recurring items, such as depreciation or bond amortization.
There may be some cases where the process reveals a legitimate transaction that was not recorded in the books. When that occurs, the person responsible for the business’s books must record the transaction using a journal entry.
Comparison of cash and accrual methods of accounting
The cash basis and the accrual basis are the two