Bank reconciliation is the process of comparing a company’s bank statement with their own financial records. The purpose of a bank reconciliation is to reconcile the differences in reporting between the bank and the company’s own books.
Typically, adjustments need to be made and noted on the company’s end to account for the differences in the records – two of which are for “outstanding checks” (checks from the company not yet cleared) and “deposits in transit” (deposits from the company made too late to be reflected on the bank statement). Additional adjustments that may need to be made include service charges or maintenance fees from the bank that have not yet been reported by the company.
Take the following bank reconciliation example, reflecting the three adjustments mentioned above:
Initial bank statement = $6,450
Initial company books = $5,000
Adjustments to be noted:
• $2,000 in outstanding checks
• $500 in deposits in transit
• $50 in bank service charges
First, the company will note the amount of the adjusted bank statement, taking into account their outstanding checks and deposits in transit:
• $6,450 – $2,000 + $500 = $4,950
The company will then adjust their books to reflect the service charges from the bank:
• $5,000 – $50 = $4,950
Adjusted bank statement = $4,950
Adjusted company books = $4,950
The bank reconciliation is complete when the adjusted bank statement matches the adjusted company records. In this example, the process is complete. If there are any discrepancies between the records, they must be found and noted.