How to prepare a bank reconciliation, the procedure, methods and filing rules.
1. Introduction
In the business world, cash is seen as the most important and delicate part in terms of its handling, use and preservation, which is why in every company there should never be a lack of good guidelines that guarantee the good use of this asset.
This importance lies in the fact that cash is the means by which goods or services are obtained, useful for the general objective of a company and which is generally managed by holding it in bank accounts. In most cases the balance of the bank statement at the end of each month and the balance that appears in the depositor's books do not coincide, in these cases it is necessary to carry out a monthly reconciliation with each of the banks in which current accounts are kept, in this way they determine the existing differences and the correct balance is achieved. Bank reconciliation is not an accounting record, but an internal cash control tool.
2. Previous accounting procedure for preparing a bank reconciliation
One of the biggest problems that arise when preparing a reconciliation is that sometimes you do NOT know what to do with the adjustments made the previous month, below are some steps or recommendations prior to studying the books to proceed with the reconciliation of the corresponding month.
| GAME OR CAUSE | PROCESS | |
| BUSINESS | BANK | |
| UNREGISTERED GAMES AT THE BANK |
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| UNREGISTERED GAMES IN THE COMPANY |
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| MISTAKES |
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Important: of NOT finding the adjustments of the errors established in the books and / or bank statement (current) these must be taken into account for the current reconciliation or if they were but with a difference in quantity or poorly located, in the same way it is will take into account for its corresponding adjustment in the current reconciliation if the opposite is the case in which such items are already registered in the books and / or bank statement (current) with and with compatible amounts, they are not taken into account for any kind of adjustment.
3. Rules for preparing the document
After carrying out these reviews, the company books are inspected together with the account statement sent by the bank and thus detect the discrepancies that exist between the two in order to adjust them.
When comparing and detecting all the differences and / or mistakes that these records may have, the document that supports the preparation of the conciliation must be prepared, respecting some presentation rules that are shown below:
- Heading.- The heading must have as basic requirements: Name of the company or company name. Name of the document "Bank Reconciliation". Date to which the document is being prepared. Name of the Bank and number of the account to be reconciled. the person who draws up the document.Type of method to use (optional).Body.- The structure of the body will depend on the method to be used to carry out the conciliation. Correct balances. (four or two columns) Balances found. (single column)
In this part of is where all the differences that may exist between the two balances will be shown, and the order that I will explain in the subsequent numeral is the same for both methods. The only thing that varies in the presentation of the methods is in the number of columns and the sign (positive or negative) that is assigned to the items that cause discrepancies between the balances.
Footer of the document.- regardless of the method used at the end, the headings of the author of the conciliation, the person who forms it and those necessary to maintain efficient internal control in the company must appear.
4. Methods for preparing a bank reconciliation
4.1. Correct balances
For such purposes, I will first focus on the Correct Balances method as it is the most used and didactic method in terms of learning to prepare a reconciliation and that for the purposes of what I will explain below will be the same for the two methods. This consists of comparing the account statement sent by the bank with the records recorded in the company's bank ledger, and then adjusting the differences until the two balances are equal. To begin preparing said document by said method, it is of utmost importance that the presentation and structuring rules of the body of the document are known:
1. First, the “Items not registered with the Bank” are presented, which include the items not settled by the bank and only the following are taken into account in this line:
1st Checks in Transit: or pending checks, are those that as a result of having issued a check but as of the date of reconciliation, it has not been cashed by the beneficiary in the bank, for which the Subscriber will appear company books and will not be uploaded to the bank statement until it is collected.
1 B. Deposits in Transit: are those deposits that are generally sent at the end of the month and these are not Accredited in the bank so they will be Loaded in the company's books but not in the account statement for the month.
2. Second, the “Items not registered in Books” are presented, which include the items not settled or omitted by the company where they are:
2.a. Credit Notes: are all the payments made by the bank for: money discounts, pledges, payments, interests in favor of the company, among others, but which have not been charged to our books.
2.b. Debit Notes: These are charges made by the bank to the company for: interest charges, commissions, discounted bills returned, among others, which due to the fact that the respective information has not been received has not been paid in the company's books.
2 C. Checks Omitted or Unregistered: these are the checks that were actually issued but were never recorded on the company's books.
2.d. Deposits Omitted or Unregistered: are the deposits that were made but their corresponding registration was not made.
3. Third, the “Errors” must be presented, where all the adjustments due to errors that the two documents may have are reflected:
3.a. Company Errors: this is where the adjustments of all errors and mistakes made by the company are included, among which we have:
- Checks of different amounts: are the checks that are paid with an amount above or below the issue amount. Deposits of different amounts: are the deposits that are charged with an amount above or below the issue amount. Bad checks located: they are those that instead of paying them were loaded. Badly located deposits: they are those that instead of being loaded were paid in the books of the company. Badly located debit and credit notes: they are those that by mistake are loaded instead of subscribe and vice versa. Deposits or Checks from other banks: they are those that are mistakenly shit or credited in the books, but that do not correspond to that account or bank, since you can have different accounts in different banks.They are those checks that reach their due date and have not yet been cashed in the bank, so they must be disincorporated by making a charge for the amount of the same.
3.b. Bank Errors: Although they are not very common, here are included the adjustments of all the Bank's omissions, errors and mistakes, among which we have:
- Checks of different amounts: are the checks that are loaded with an amount above or below the issue amount. Deposits of different amounts: are the deposits that are paid with an amount above or below the issue amount. or not registered: are the checks that were actually issued but were not recorded in the bank statement. Deposits Omitted or not registered: are the deposits that were actually issued but were not recorded in the bank. Badly located checks: are those that instead of loading them, they were paid. Badly located deposits: those instead of paying them were loaded in the bank statement. Badly located debit and credit notes: they are those that are mistakenly charged instead of being paid and vice versa. Checks from other companies:They are those who mistakenly shit or pay at the bank, but do not correspond to that account, since a bank has several clients.
Important: the order from 1) to 3) must be presented as shown here, contrary to their numerals or breakdowns whose order can be any, the main thing is that all the necessary adjustments are reflected to achieve the correct or found balances.
Example of a reconciliation prepared by the correct balances method:
The following document reflects the movements in July in the Bolívar Fuerte bank ledger belonging to El Trébol CA:
| BANCO BOLÍVAR FUERTE MAYOR BOOK | ||||
| ACCOUNT CODE Nº: 1.1.02.01.02 | ||||
| CTA. CURRENT No. 5698-22356-96 MOVEMENTS JULY 2006 | ||||
| DATE | CONCEPT | SHOULD | TO HAVE | BALANCE |
| 07/01/06 | Balance | 230,000.00 | ||
| 07/01/06 | Deposit Correction No. 1956 | 166,500.00 | 396,500.00 | |
| 07/01/06 | Correction of Check Nº 4505 | 122,600.00 | 273,900.00 | |
| 07/02/06 | Check No. 4508 | 47,700.00 | 226,200.00 | |
| 07/04/06 | Deposit No. 3984 | 180,000.00 | 406,200.00 | |
| 07/06/06 | NC Discounted Effects | 100,000.00 | 506,200.00 | |
| 07/14/06 | Check No. 4509 | 55,000.00 | 451,200.00 | |
| 07/20/06 | Check No. 4510 | 52,000.00 | 399,200.00 | |
| 07/25/06 | Deposit No. 4866 | 130,000.00 | 529,200.00 | |
| 07/28/06 | Check No. 4511 | 65,500.00 | 463,700.00 | |
| 07/30/06 | Deposit No. 5698 | 78,000.00 | 541,700.00 | |
| 07/28/06 | Check No. 4512 | 15,800.00 | 525,900.00 | |
| 07/31/06 | Deposit No. 6892 | 40,000.00 | 565,900.00 |
This is the account statement sent by the bank as of July 31, 2006:
| BANCO BOLÍVAR FUERTE SACA | CONTROL No. 3377233 | |||
| Capital Bs. 280,000,000.00 | EL CLOVER CA | |||
| ACCOUNT STATUS | Account code No. 5698-22356-96 | P. 1/1 | ||
| FROM 07/01/2006 TO 07/31/2006 | ||||
| DATE | CONCEPTS | CHARGES | FERTILIZERS | BALANCES |
| JULY | Balance | 185,900.00 | ||
| 01 | Deposit No. 2365 | 153,800.00 | 339,700.00 | |
| 02 | Check No. 4508 | 47,700.00 | 292,000.00 | |
| 05 | Deposit No. 3984 | 180,000.00 | 472,000.00 | |
| 06 | NC Discounted Effects | 100,000.00 | 572,000.00 | |
| 06 | ND Collection expenses | 5,000.00 | 567,000.00 | |
| fifteen | Check No. 4506 | 25,000.00 | 542,000.00 | |
| twenty | Check No. 4510 | 25,000.00 | 517,000.00 | |
| 25 | Deposit No. 4866 | 130,000.00 | 647,000.00 | |
| 30 | Deposit No. 5698 | 78,000.00 | 725,000.00 |
Now we will see the reconciliation that was carried out last month to adjust the balances, see that they already bring a different balance from the beginning, 230,000.00 Dr. according to books and 185,900.00 according to bank Cr.
| EL CLOVER CA | |||
| BANK RECONCILIATION | |||
| BANCO BOLÍVAR FUERTE AS OF 06/30/06 | |||
| CURRENT No. 5698-22356-96 | |||
| METHOD: CORRECT BALANCES | |||
| DESCRIPTION | PARTIAL | BOOKS | BANK |
| Balances at 06/30/06 | 230,000.00 | -185,900.00 | |
| CHECKS IN TRANSIT | |||
| 06/17/06 Check Nº 4506 | 25,000.00 | ||
| 06/20/06 Check Nº 4507 | 40,800.00 | 65,800.00 | |
| TRANSIT DEPOSITS | |||
| 06/30/06 Deposit No. 2365 | 153,800.00 | -153,800.00 | |
| COMPANY ERRORS | |||
| Deposit No. 1956 registered | 18,500.00 | ||
| Deposit No. 1956 correct | 185,000.00 | 166,500.00 | |
| Check No. 4505 misplaced | 61,300.00 | -122,600.00 | |
| CORRECT BALANCES AS OF 06/30/06 | 61,300.00 | 273,900.00 | -273,900.00 |
As can be seen in the previous reconciliation, the balances of the books and the bank were adjusted until they were equalized, which turns out to be the end of the reconciliation.
Now I will prepare the reconciliation for the month of July with the same method to demonstrate what are the differences between the two and thus arrive at the "correct balances" that both should have.
As already explained in the first part, the items that were adjusted in the last reconciliation must be checked first, to which it must be inspected if said items have already been settled, otherwise they should be taken into account for the current reconciliation.
In this way, you can notice the check No. 4506 was already cashed by your beneficiary on July 15, contrary to No. 4507 which still does not appear on the account statement as cashed, so if the check does not have an expiration date, it will be consider that it is still in transit.
Also see that deposit No. 2365 was recorded in the bank's books at the value that was recorded in books, if there is any difference in deposits or checks in transit, we proceed to determine who the error is, because in such a case, either by omission or difference in quantity, the adjustment of said items must be reflected in the reconciliation for the month of July.
Company errors were also recorded in the bank ledger, so they will not be taken into account to adjust.
Now, we review what are the differences that arose as a result of the operations carried out in the month of July, so that they are compared item by item, in this example we find the following: as checks in transit they are at No. 4507 last month, and Nº 4509, 4511 and 4512 of this month, as deposits in transit we have only Nº 6892, there is a Debit Note for collection expenses of the discounted effects that was not registered, and finally we find a difference in check Nº 4510 which was recorded in books for Bs. 52,000.00 and appears charged for Bs. 25,000.00, with an analysis of the supports found it was deduced that the error was made by the company.
When finding the items to be adjusted, the internal control document is carried out:
| EL CLOVER CA | |||
| BANK RECONCILIATION | |||
| BANCO BOLÍVAR FUERTE AS OF 07/31/06 | |||
| CURRENT No. 5698-22356-96 | |||
| METHOD: CORRECT BALANCES | |||
| DESCRIPTION | PARTIAL | BOOKS | BANK |
| Balances at 07/31/06 | 565,900.00 | -725,000.00 | |
| CHECKS IN TRANSIT | |||
| 06/20/06 Check Nº 4507 | 40,800.00 | ||
| 07/14/06 Check Nº 4509 | 55,000.00 | ||
| 07/28/06 Check Nº 4511 | 65,500.00 | ||
| 07/28/06 Check No. 4512 | 15,800.00 | 177,100.00 | |
| TRANSIT DEPOSITS | |||
| 07/31/06 Deposit No. 6892 | 40,000.00 | -40,000.00 | |
| DEBIT NOTES | |||
| 07/06/06 Collection Expenses | 5,000.00 | -5,000.00 | |
| COMPANY ERRORS | |||
| Check No. 4510 registered | 52,000.00 | ||
| Check No. 4510 correct | 25,000.00 | 27,000.00 | |
| CORRECT BALANCES AS OF 07/31/06 | 587,900.00 | -587,900.00 |
Now let's see the same document but made with four columns:
| EL CLOVER CA | ||||
| BANK RECONCILIATION | ||||
| BANCO BOLÍVAR FUERTE AS OF 07/31/06 | ||||
| CURRENT No. 5698-22356-96 | ||||
| METHOD: CORRECT BALANCES | ||||
| DESCRIPTION | BOOKS | BANK | ||
| SHOULD | TO HAVE | SHOULD | TO HAVE | |
| Balances at 07/31/06 | 565,900.00 | 725,000.00 | ||
| CHECKS IN TRANSIT | ||||
| 06/20/06 Check Nº 4507 | 40,800.00 | |||
| 07/14/06 Check Nº 4509 | 55,000.00 | |||
| 07/28/06 Check Nº 4511 | 65,500.00 | |||
| 07/28/06 Check No. 4512 | 15,800.00 | |||
| TRANSIT DEPOSITS | ||||
| 07/31/06 Deposit No. 6892 | 40,000.00 | |||
| DEBIT NOTES | ||||
| 07/06/06 Collection Expenses | 5,000.00 | |||
| COMPANY ERRORS | ||||
| Correction of Check No. 4510 | 27,000.00 | |||
| SUBTOTALS | 592,900.00 | 5,000.00 | 177,100.00 | 765,000.00 |
| CORRECT BALANCES AS OF 07/31/06 | 587,900.00 | 587,900.00 |
Where as it is observed, the adjustments are made by four columns without placing any negative sign because in this way completely unnecessary, the sub-totalization is carried out where all the columns are vertically added to then extract the final balance through the difference both, both in books and in the bank.
4.2. Balances found
This method is based on preparing the reconciliation starting with one of the two balances, (the Bank or the Company), and then reflecting in a single column the differences, deposits or checks that compensate for the discrepancies between the two, so that in the end it is in the opposite balance, which turns out to be the purpose of this method.
To exemplify we will take into account the previous one, for which I will point out the presentation of the document:
| EL CLOVER CA | ||
| BANK RECONCILIATION | ||
| BANCO BOLÍVAR FUERTE AS OF 07/31/06 | ||
| CURRENT No. 5698-22356-96 | ||
| METHOD: BALANCES FOUND | ||
| DESCRIPTION | PARTIAL | TOTAL |
| BALANCE ACCORDING TO BANK AS OF 07/31/06 | 725,000.00 | |
| CHECKS IN TRANSIT | ||
| 06/20/06 Check Nº 4507 | 40,800.00 | |
| 07/14/06 Check Nº 4509 | 55,000.00 | |
| 07/28/06 Check Nº 4511 | 65,500.00 | |
| 07/28/06 Check No. 4512 | 15,800.00 | -177,100.00 |
| TRANSIT DEPOSITS | ||
| 07/31/06 Deposit No. 6892 | 40,000.00 | 40,000.00 |
| DEBIT NOTES | ||
| 07/06/06 Collection Expenses | 5,000.00 | 5,000.00 |
| COMPANY ERRORS | ||
| Check No. 4510 registered | 52,000.00 | |
| Check No. 4510 correct | 25,000.00 | -27,000.00 |
| BALANCE ACCORDING TO BOOKS AS OF 07/31/06 | 565,900.00 |
Note that in this case, the balance of the account statement (Bs. 725,000.00 Cr.) Was started, then all the adjustments were reflected as well as the previous method, but in a single column, until at the end it was “found ”The balance of the Bank's major (Bs. 565,900.00 Dr.).
Bibliography
- Paton, NA, Accountant's Manual, Editorial Mc Graw Hill, Argentina, III Edition 1994 Finney Miller, Accounting Course, Chapter III, Editorial Mc Graw Hill, Mexico, II Edition 1999 Francy Ortiz, Study Guide El Efectivo, Subproject Accounting II, UNELLEZ -APURE. 2004
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To finish we recommend the following video course (4 videos, 1 hour and 36 minutes), through which you can learn more about bank reconciliations, adjustments and their preparation through practical exercises and the clear explanation of Lic. At Comercio y Contaduría Elsa Marina Rangel Hernández, we trust that you will find it useful as a study complement.
