The bank reconciliation

The bank reconciliation is an important schedule that all businesses should prepare regardless of their size, type or industry in which they operate. Timing issues, such as outstanding cheques and outstanding lodgements, means it is rare for the bank control account in the business’ financial records to agree to the actual cash in the business’ bank account. It is, however, important to document the differences between the balances recorded in the bank statements and the balance recorded in the accounting records, and this is where the bank reconciliation comes in to play.

“What is the point of preparing the bank reconciliation?” is a question you may well be asking yourself. Preparing the bank reconciliation will provide some comfort that all transactions are fully and accurately recorded in the business’ financial records. Many businesses will make payments to suppliers and accept receipts from customers via direct debit, standing order, BACS, Paypal or some other method of direct transfer.

Payments and receipts that go directly through the bank carry little paper work, and they are easy to miss when posting the financial records. Similarly, there are other items that will only come to light when the bank statements are received. Such items include bank charges, bank interest paid and bank interest received. Preparing a bank reconciliation will help identify these items.

Incomplete information and missing transactions makes it impossible to prepare accurate and useful management reports such as interim management accounts, an interim profit and loss statement or an interim balance sheet. Preparing the bank reconciliation will ensure all bank transactions are picked up in the financial records allowing the preparation of accurate management reports and useful information.

A typical bank reconciliation schedule will consist of;

  1. Balance per the bank statement
  2. Less outstanding cheques
  3. Add outstanding lodgements
  4. Schedule total

The “Total” should agree to the bank control account balance in the financial records. If the total agrees to the financial records you can be comfortable that all transactions are fully and accurately recorded in the financial records. If there is a difference between the “Total” and the financial records you will need to do some investigation and update the financial records accordingly. 

A calculator and some highlighter pens - the essential tools to prepare a bank reconciliation.

Bank reconciliation toolsCredit: yackers1

Preparing the bank reconciliation is an easy task however it does require some thought, attention to detail and a methodical approach. If you identify a difference when preparing the bank reconciliation the only way to find it is to tick the financial records back to the physical bank statements, which can be a boring and long-winded task.

The bank reconciliation ensures all transactions are accurately recorded in the financial statements therefore it is important to prepare the bank reconciliation on at least a monthly basis. Many regulated businesses, such as solicitors (which are regulated by the SRA) and insurance companies (which are regulated by the FSA), are required to prepare monthly bank reconciliations and failure to do this is a breach of the rules which is likely to lead to disciplinary action and possible suspension, which could lead to business failure.

The introduction of internet banking has made preparing the bank reconciliation easier and quicker than ever before. Prior to internet banking you had to wait for the period end bank statements to be delivered, which could took anything up to two weeks, before the bank reconciliation could be prepared. Internet banking offers real time information and it is possible to download period end bank statements the day after the end of the period which means it is possible to prepare accurate management information quickly and efficiently.

A calculator is an essential tool for an accountant.

Close up of a calculator and penCredit: yackers1

Many people underestimate the usefulness of the bank reconciliation and fail to understand its true meaning. The bank reconciliation is the best way of ensuring all transactions are fully and correctly recorded in the financial records, which allows accurate, timely and useful management information. The bank reconciliation is a schedule that should be prepared at least monthly and a part of every month end procedure.