A bank reconciliation statement is a form used to compare internal records of checking account activity to those stated by the bank.
The intent of the statement is to uncover any differences between the two sets of information, which can then be corrected. There are several possible types of discrepancies:
- Timing differences. This can be caused by deposits made by the account holder that have not yet been recorded by the bank, or by checks issued by the account holder that have not yet been presented to the bank.
- Fees. The bank may have charged an account servicing fee, a not sufficient funds fee, a lifting fee, an overdraft fee, or a variety of other charges, that the account holder has not yet recorded.
- Electronic payments. The bank may have received electronic payments into the account, or processed electronic payments from it (such as an ACH debit transaction), of which the account holder was not aware.
- Errors. Either the account holder or the bank may have recorded deposits, checks, or other charges in error.
Once uncovered, the account holder either contacts the bank to notify it of errors made by the bank or (much more likely) adjusts its own records to bring them into alignment with the bank's records, net of any timing differences.
Many banks include a blank bank reconciliation statement in their month-end account statements, for the use of account holders. Providing this form is also useful for the bank, since it encourages account holders to attend to the transactions flowing through their accounts, and so clears up any long-term confusion about account balances.
A more proactive business may elect to update a bank reconciliation statement on a daily basis, using account information made available on-line by its bank; doing so allows the company to spot errors or even possible cases of fraud much more quickly than would be the case with a month-end reconciliation.
Follow these steps to prepare a bank reconciliation statement (the precise steps will vary, depending on the layout of the form being used):
- Enter the cash balance recorded by the bank at the top of the form.
- Subtract the total of all checks that have not yet cleared the bank.
- Add the total of all deposits in transit to the bank.
- Subtract the cash balance recorded by the account holder.
- Investigate any remaining variances and adjust as necessary. The eventual result should be a variance of zero.
It is much easier to fill out an on-line bank reconciliation statement, which is a commonly-provided module in many accounting software packages. In an on-line statement, you check off all deposits and checks recorded by the bank, leaving just in-transit and other residual items for further examination. After a few iterations to record variances from the bank's records, the on-line form should present a net zero variance. At that point, you typically print the statement and store it with the month-end closing records.
Bank reconciliation statements should be retained and archived by period, so that they are readily accessible when needed during the annual audit.