Elements of Bank Reconciliation
Bank reconciliation is a statement that brings into agreement the company’s book balance of cash and the bank statement balance of the depositor’s company. Commonly, it is prepared monthly because the bank provides the depositor with the bank statement at the end of every month.
To fully understand the process of bank reconciliation, three key elements must be considered-the Bank Statement Balance, the Company’s Book Balance and the related reconciling items.
Bank Statement Balance
It is a monthly report of the bank to the depositor showing the cash balance per bank at the beginning, total deposits made by the depositor and other bank credits during the month, the checks paid and the daily cash balance per bank during the month. Actually, it is an exact copy of the depositor’s ledger in the records of the bank. It is sometimes referred to as the cash balance per bank.
Company’s Book balance
The company’s book balance or depositor’s record is an account related to the bank’s cash balance. When a deposit is made by a company in the bank, a related entry is made in the company’s record, debiting cash and crediting whatever the name of the company. However, if the company issued a check, the depositor’s account is decreased. This shows that the book’s balance is a reciprocal account of the bank’s balance. The reason for this is that the two accounts cover or reflect the same items or transactions. Thus, if one account is debited, the other account is credited or vice versa.
These are items needed to reconcile both the book and bank balances. Reconciling items include Credit Memos and Debit Memos. Credit memos comprise notes or drafts collected by bank in favor of the depositor, proceeds of bank loan credited to the account of the depositor and interest earned on the company’s checking account. While debit memos can be broken down into NSF checks, Technically Defective checks, Bank Service charges and Reduction of Loan.
Another reconciling item that must be treated are errors made by the bank or the company. The error depends on who committed the error; whether the bank or the company. Usual errors are understatement of cash receipts on the bank of the depositor, understatement of checks drawn by the depositor, deposit of another company credited by the bank to a company’s account and check of a company charged to another company’s account.