Everything You Need To Know About Bank Reconciliation Statement!

Making Bank Reconciliation Statement (BRS) is an essential accounting activity that every business requires. A BRS reconciles the transactions from account books with the bank statement. If the results of both the activities match, you can rest assured that there is no fraud or mistake!

So, here are all the details about BRS- what it is and how to make it. We have also illustrated an example at the end that demonstrates the process. So, let us begin!

 

 

What Is A Bank Reconciliation Statement?

A Bank Reconciliation Statement connects the cash balance in the accounting books to the cash balance in the bank account. If the reconciled amount matches, the objective is achieved. The BRS is performed at a regular interval, usually a month, by the accountant.

The reason why a BRS is so essential is that it points out any mistakes in the accounting system. It makes sure that the company’s cash records are correct. Lastly, it can dig out any cash manipulations, making your company fraud-safe.

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Now that we know what is a BRS, and why it is so essential. Let’s understand how to make it!

 

 

How To Make A Bank Reconciliation Statement?

A BRS is made in two steps. The first step comprises of bank statement reconciliation and the second adjusting balance per book. When the resultant value of both the steps comes equal, our work is done.

So, what do we need to make a BRS? We need the bank account statements of the previous and the current month bank statement and, of course, the closing balance of the account.

Another essential point to note is that you need to consider all the transactions until the previous day. Why? Because there might be some ongoing transactions on the present day, which can create discrepancies. So, it is in the best practices that you take transactions until the last day.

 

Bank Reconciliation Statement

This step, as the name implies, involves working with the bank account statement.

The process starts with digging out the unprocessed checks and deposits.  So, how do we do that? Simple, compare the bank’s issued list of checks and deposits with the bank statement entries. Once you have the list of unprocessed checks and deposits, we are all ready to start.

Step 1: Take the bank account’s cash balance and add any deposits in transit.

Reason: It might be that you have received payments and checks that the bank has not yet processed. Thus they are in the books, but your bank account is unable to reflect that.

Step 2: Now, deduct all the unprocessed cheques.

Reason: Possibly, you gave a check of, let’s say, $1,000 to a supplier a day before you are preparing this BRS. Your supplier might haven’t yet encashed it. Thus you have it in the books, but it is not reflecting in your bank account statement.

After you are done adding and subtracting the right amounts, you have the reconciled bank account figure. One thread is complete; let us move on to the other one!

 

Adjusting Books Per Balance

So, it is time to reconcile the account books of your business.

The critical elements in this part of the process are listing all the banking fees, penalties, and NSF checks on one side and the interest earned and notes receivable amount on the other from the bank statement. Once you have all of them, it is time for some basic math.

Step 1: Take the closing cash balance from the accounting books. Now, subtract all the banking fees, penalties, and NSF checks.

Reason: Bank deducts all these amounts automatically from the account, and thus our account books don’t have such entries. Therefore we need to make a journal of these entries and also deduct these entries while making BRS.

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Step 2: Now add any interest earned and notes receivable amount.

Reason: Bank also credits your interest and any other amount automatically, and thus, again, our books do not reflect it.

Now, after adding and subtracting all these amounts, you have yet another reconciled figure.

If the figure from the above step and this step match, then congrats! You have done the job correctly, and your objective has been achieved. If not, either you should check your work or dig out the reason for the mismatch!

 

 

An Illustration

A company ABC wants to prepare a BRS with the following details:

  1. Its ending balance of bank statement is $400,000, and the ledger is $325,700
  2. The bank statement shows a $100 service charge
  3. The interest income of the bank account is $40.
  4. ABC has issued checks of $75,000 that have not yet been processed.
  5. ABC has also deposited $10,000, but that does not reflect in the bank account.
  6. A check of $500 was misreported in the journal for $400.
  7. The bank got a note receivable of $10,000.
  8. A check amounting to $540 has been given back due to an NSF error.

The journal entries for the above situation are given below:

Amount Adjustment To Books
Bank Account Ending Balance $400,000
Deduct: Uncleared checks -$75,000 None
Add: Unprocessed Deposits +$10,000 None
Reconciled Balance $335,000
Ledger’s Ending Balance $325,700
Deduct: Service charge -$100 Debit Expense, Credit Cash
Add: Interest Income +$40 Debit Cash, Credit Income
Deduct: Check Error -$100 Debit Exoense, Credit Cash
Add: Note Recievable +$10,000 Debit Cash, Credit Notes Recievable
Deduct: NSF -$540 Debit Accounts Recievable, Credit Cash
Reconciled Book Balance $335,000

 

Since both the reconciled amounts match, we can rest assured that there are no more mistakes in the cash records, and our business is also fraud-safe! Now you can prepare a BRS from the above journal entries.

 

 

Parting Words

The Bank Reconciliation Statement is a valuable and important document. Not only it ensures the books are error-free, but auditors use it for their year-end auditing.

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Thus, we should prepare a BRS every month or as required and keep it safe. Many tools like Tally etc., are used to make the task easier and automatic. But it is always helpful to know the manual process as it holds the basics of the process.

We hope you liked the article! If you have any doubts, questions, or suggestions, please drop them below in the comments section. We are all ears!