Question

what is a bank reconciliation? what are the steps in preparing a bank reconciliation? what purpose does it serve?

Answer 1

A bank reconciliation is the matching of the bank balance in the books of an organisation with that of the statement from the bank. This involves arriving at one balance(say balance as per bank) after making necessary adjustements to the other balance (say book balance)

The steps involved in the preparation of the reconciliation are as follows:

1. Let us start with the balance as per bank statement.

2. Add all the amounts which are debited (reducing the balance ) in the bank statement and not in the books -- This is done because , the book balance is showing higher amount due to these amounts.

Example of these amounts, are --- (a) Charges which the bank has charged for transacions, (b) NSF checks which the organisation does not know. etc.

3. Add all the amounts which are aded in the books which are not reflected in the bank statement.

Example : Cash sent by the organiastion , which has not been accounted by the bank due to some reason.

4. Deduct amounts credited by bank towards direct collection, which the organisation is unaware of.

5. Deduct amounts credited by bank towards interest earned etc, which is unknown to the organisation , and which are accounted by them.

The purpose of the bank reconciliation is.

1. To record correctly the various expenses like bank charges to arrive at the correct income for the period.

2. To record all the direct credits / NSF checks from customers to have a true picture of the receivables position.

3. To record all the payments which are under standing instructions so as to have correct status of the payables.

4. To recognise the checks which have not been paid out by the bank, so as to follow up with the concerned suppliers.