What is Bank Reconciliation?

Companies carry out bank reconciliation to check if their records such as general ledger, check register, and balance sheet are correct. Bank reconciliation is a process to compare the company’s recorded figures with the bank statement’s figures. We need to explain any differences, then the bank statement will be specified by the accountants that it is reconciled if there are no inexplicable differences.

Every business needs to do bank reconciliation to have internal control over the assets, or to get an accounting service in Johor Bahru to do it, despite there is weakness in the accounting system. It must be carried out by somebody aside from a licensed record keeper or cheque signer to be efficient and accurate.

Example of Bank Reconciliation

On July 6, a new business opens the current account with deposit of RM20,000. Throughout July, there are six cheques written by the company at a sum of RM6,000. In the night depository of the bank, the company deposited RM3,000 on July 28. Subsequently, the company’s Cash at Bank account on July 30 in general ledger reveals a debit balance which is RM9,000.

The bank statement reveals the balance of July 30 at RM6,950. Keep in mind that the bank statement’s balance can be different from the balance of the Cash at Bank account of the company, which is at RM9,000. Normally, neither both balances are the right quantity of money that must be shown on the company’s balance sheet.

We need to compare the information to reconcile the bank’s balance and the company’s balance.

  • On the bank statement, a charge of the bank service at RM50 is shown but does not show on the company’s general ledger.
  • The bank statement does not show one of the company’s six cheques composed in July that has a quantity of RM1,000.
  • The bank statement does not display the RM3,000 deposit by the company which is on July 28.

To carry out the bank reconciliation, we choose to adjust both the balance of the bank statement and the company’s cash at bank balance so that they are the correct quantity of the balance of business’ current account.

  • The balance of the company’s Cash at Bank account of RM9,000 should be reduced by RM50 as the charge for bank service. Thus, the balance of the company’s books is RM8,950. If it agrees to the adjusted balance of the bank, this is the quantity that should be shown on the balance sheet.
  • For the bank statement balance, the balance of RM6,950 should be reduced by the RM1,000 check and increased for the RM3,000 deposit. After these changes, the modified balance of the bank will be RM8,950 (RM6,950 + RM3,000 – RM1,000).

Considering that both the bank statement and the company’s books reached an altered balance at RM8,950, the bank statement is reconciled and therefore cash flow recorded are appropriate (Also see Avoid These Mistakes When Forecasting Cash Flow). You may seek for any accounting firm in Johor Bahru to learn more about bank reconciliation for more comprehensive illustration of bank reconciliation.