Describe about bank reconciliation concept in accounting & finance

Bank reconciliation concept is comparing of balance sheet with bank statement. There is no fixed date for preparing bank reconciliation so its prepared periodically to check the balances and adjustments are made, if needed.

It helps in detecting errors, cash manipulations, frauds etc. One thing we have to remember is that, not always both the balances are equal.

Some of the reasons are as follows −

  • Cash and check transactions are recorded in bank statement.
  • Outstanding checks.
  • Bank service fees.
  • Interest.

Bank reconciliation terminology includes −

  • Deposit in transit − It occurs when the deposit arrives at bank too late, entity not deposited in the bank. Mont end deposits will not appear in the statement

  • Outstanding checks − Checks which are not cleared by the bank by the month end

  • NSF check − NSF means NOT SUFFICIENT FUNDS. If there are no sufficient funds in the bank account, the bank will not entertain the cheque issued by the firm.

Bank reconciliation procedure −

  • Compare number of cheques issued and deposited cheques in the statement to identify deposit in transit and uncleared cheques.

  • Add deposit in transit.
  • Deduct outstanding cheques (if any).
  • Adjust bank cash balance.
  • Add interest earned, notes receivable amount in the balance sheet.
  • Adjust firm cash balance by deducting bank service fees (if any), NSF checks and penalties.

Bank reconciliation problems include −

  • Uncleared cheques that has not been presented.
  • Cheques cleared in the bank after voided.
  • Deposited cheques returned back.

Benefits of bank reconciliation include −

  • Detecting errors.
  • Tracking interest and fee.
  • Detecting frauds.
  • Tracking receivables.