Bank Reconciliation

A bank reconciliation statement is a critical step in the accounting cycle that helps ensure the accuracy of a company's financial records. Specifically, it involves comparing the company's internal records of its bank transactions (as recorded in its cash account in the general ledger) with the bank's records of those transactions (as provided in the bank statement).

This is critical for the preparation of accurate financial statements, particularly the balance sheet and the cash flow statement.

The goal of a bank reconciliation is to identify any discrepancies between these two sets of records and determine the reasons for those discrepancies. Common reasons for discrepancies might include:

Checklist

Outstanding Checks

These are checks that the company has issued and recorded in its books, but that have not yet been cashed or deposited by the recipient and thus not yet deducted from the company's bank account.

Deposits in Transit

These are deposits that the company has made and recorded in its books, but that have not yet been processed by the bank and thus not yet added to the company's bank account.

Bank Errors

These could include mistakes made by the bank in recording deposits, withdrawals, or charges.

Book Errors

These could include mistakes made by the company in recording its transactions.

Bank Charges or Credits

These are amounts that the bank has deducted or added to the company's account for fees, interest, or other reasons, and that the company may not yet have recorded in its books.

Summary

By identifying and resolving discrepancies, a bank reconciliation helps ensure that a company's financial records accurately reflect its actual cash position.

In terms of the accounting cycle, a bank reconciliation is typically performed as part of the end-of-period procedures, after the trial balance has been prepared but before the financial statements are finalized. This allows any necessary adjusting entries to be made based on the results of the reconciliation