Question

A bank reconciliation is
a. A formal financial statement that list all of the bank account balances of an enterprise.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the differences between an enterprise’s cash balance as
shown on its bank statement and the cash balance shown in its general ledger.

Answer 1

The correct answer is option d. A Bank reconciliation is a schedule that accounts for the difference between an enterprise's cash balance as shown on its bank statement and the cash balance shown in its general ledger. These difference are determined between the two so that the changes in the accounting records can be made, discrepancies can be resolved and fraudulent transactions can be identified.

How a bank reconciliation is done:

Bank reconciliation is done by comparing the balance reported by the bank with the balance in the company's general ledger.

Cash book is maintained by the company for recording both cash transactions and bank transactions. There are two columns in the cash book, one is cash column and the other is bank column. The cash column shows the cash available whereas the bank column reflects the cash balance as the bank. In the cash books, the deposits are recorded on the debit side, whereas the withdrawals are recorded on the credit side.

In the same way, bank maintains every customer's accounts. Any deposit made by the customer in the bank are recorded on the credit side and any withdrawals by the customer from the bank accounts are recorded on the debit side of the bank statement in the bank books. These statement are sent by bank on a regular basis to the customer.

There may be some cases where the statement issued by the bank does not match with the company's books. In such cases, the difference is determined by doing a bank reconciliation.

Steps for doing bank reconciliations:

1. First of all, we compare the the cash book and bank statements by comparing the debit side in the bank column of the cash book with the bank statement's credit side. Also, the credit side in the bank column of the cash book with the bank statement's debit side. The transactions which matches completely required no adjustments.

2. Adjusting the bank statement: Next step is to made adjustments in the bank statement to get to the correct balance. This can be done by adding the deposit in transit, deducting the outstanding checks and adding/deducting bank errors to the bank statement.

Deposit in transit means amount which has been added in the cash book but is still not recorded as deposit by bank. In such case, it is added to the bank statement.

Outstanding checks means the check which has been deducted from the cash books but has not been cleared by the bank yet and has not been deducted in the bank statement. In such case, it is deducting from the bank statement.

Bank errors means mistakes made by bank such as omitting any amount in the bank statement.

3. Adjusting the cash books: Now, take the bank column of the cash books and adjust it by adding the interest earned or deducted any bank charges or fees to get to the correct balance as per cash books.

Bank charges means any charges which has been deducted by the bank for processing as per the banking policies. such as monthly bank charges or charges for taking overdraft from the bank account. Such charges will be deducted from the cash book balance.

Interest is added by the bank in a customer's account and such interest earned will also be added in the cash books if not added earlier.

Another one is transaction related to non sufficient funds checks, which means bank has not honored the check because of insufficient funds in the bank accounts. In other words, it means that the check has not been deposited in your accounts and thus it will be deducted from the cash books.

Other errors means the amount entered incorrectly or has been omitted from the records. Such amount will be added or deducted from the cash book, as per the case.

4. Last step is comparing the adjusted balances as per the books and as per the bank. The adjusted balance as per the cash books and as per the bank statements (as calculated above) should match.