Modified on 2010/04/30 22:31 by jwilkinson — Categorized as: Uncategorized
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5 C's of Credit (5 C's of Banking)
Bank Reconciliation Definition
Bank reconciliation defined
is the settlement of records between the balance per company financials and the balance per the bank statement. The process of accounting bank statement reconciliation is essential because of the many timing differences and errors in the recording process between two parties. When effectively implemented it assures that the bank as well as the business have relevant financial statements.
Bank Reconciliation Meaning
Bank reconciliation means
reconciling financial statements which are owned by both the business itself and the bank statement. Without bringing these 2 records together the process of bank reconciliations would not bring value. From here each account is checked with records to assure a purchase date, income or expenditure, notes or additional needs, and more. This part, specifically, is where many differences arise. The cause of these may include bank deposit and work hours, policies and procedures for both entities, and more. Due to the different record keeping methodologies an alignment must be made to assure that each party has an operable understanding of the financial state of the company.
Bank reconciliation methods and procedures are focused on attaining adjusted cash balances which can be assembled into statements for both the bank and the associated business.
To avoid fraud while performing cash reconciliation, an employee who has no other connection with company cash should be delegated this task.
Bank Reconciliation Method
To begin the
bank reconciliation method
, enter bank and company balance on a schedule. This will create the initial foundation for the process to proceed. It is important to include the previous bank reconciliation form, if any, to establish differences between current records and this. Once this has been done the process moves on to find differences in the accounts of the current period.
Next, look for deposits in transit. These are deposits recorded by the company which are not yet in the bank records. Compare the bank statement deposits with the business' internal deposit register. Any which are not yet included in bank forms are deposits in transit. Add these to bank statements to form two equal records: one for the bank and one for the firm itself.
Then, find outstanding checks. These are checks written by the company which have not yet been fulfilled by the bank. Compare bank statement listings for paid checks with checks issued by the business under the cash payments journal. Any such checks which have been issued but not yet paid are outstanding checks. Deduct these from the bank records.
Now, find any errors. An example of one such error would be a returned check which was recorded as $50 but is actually in the amount of $60. Bank errors, when corrected, effect the adjusted balance of company records. The inverse is the case for company errors.
Finally, compile any final changes. These can include fees, interest, and other additional notes.
The bank reconciliation format should be completed in this order to cover all important issues. A solid policy must be in place for bank reconciliation statements to be useful.
Bank Reconciliation Example
Minnie is the CFO for Debt Collect LLC, a privately held debt collections company. Debt Collect is in good financial condition and regularly keeps up with their accounting work. Today, Minnie is tasked with the bank reconciliation process.
Minnie begins by collecting the relevant information. She sends a memo to all company accountants instructing them to make any final changes which effect overall company financial statements. After some time, she has all of her necessary records.
Minnie then sets down to perform her reconciliation. She enters both bank and company balances on a schedule. She also compares this with her previous reconciliation form.
Minnie notices deposits are not at the same level. This is quickly corrected when she accounts for deposits in transit. The forms are reconciled and she moves on.
Minnie then accounts for outstanding checks. Upon examination, her work reveals a major problem. Her cash payments journal is much higher than that of the bank. She looks further to discover a very high level of bounced checks. Further research shows that debt holders, convinced by company contact, are sending checks. The problem is that they are not sending checks that can be fulfilled. She, after looking at company policy, prepares some procedure changes which should have the effect of preventing non-collectible checks from being sent.
Minnie completes her bank rec with no additional problems. She is satisfied by her analysis because it yielded results that will show her to be one of the great minds of the company. She looks forward to presenting her ideas to the board of directors and helping her employer.