Cash and Bank Reconciliation Procedures

Understanding Bank Statements and Internal Records

Accurate financial reporting requires a systematic comparison of a company's internal cash records with its bank statements. Discrepancies arise from timing differences in recording transactions and errors in either set of records. Reconciliation aims to identify and correct these discrepancies, ensuring that financial statements accurately reflect the company's cash position.

Steps in the Reconciliation Process

• Obtain Bank Statement: Secure the latest bank statement from the financial institution. Verify the statement date and account details.
• Prepare a Reconciliation Schedule: Create a worksheet with columns for bank statement balance, additions, and subtractions.
• Identify and Classify Deposits in Transit: These are deposits made by the company but not yet reflected on the bank statement. Add these to the bank statement balance.
• Identify and Classify Outstanding Checks: These are checks issued by the company but not yet cashed by the recipients. Deduct these from the bank statement balance.
• Account for Bank Charges and Fees: Deduct bank charges, service fees, and other debits from the bank statement balance, ensuring these are recorded in the company's books.
• Account for Non-Sufficient Funds (NSF) Checks: These are checks received by the company but later returned due to insufficient funds in the payer's account. Deduct these from the company's book balance.
• Account for Bank Errors: Investigate any discrepancies identified between the company's records and the bank statement. Correct any errors found on either side.
• Account for Notes Receivable: Include any notes receivable collected by the bank on behalf of the company, adding them to the book balance.
• Account for Electronic Transfers: Confirm that all electronic payments and receipts are accurately reflected in both the bank statement and the company's records.
• Reconcile Book Balance: Start with the company's cash balance per its general ledger. Add any deposits not yet recorded, and subtract any unrecorded checks, bank charges, NSF checks, or other adjustments.
• Compare Adjusted Balances: The adjusted bank balance and the adjusted book balance should now match. Any remaining differences require further investigation to identify and correct the underlying causes.
• Document the Reconciliation: Maintain a well-organized reconciliation schedule, including supporting documentation for all adjustments made. This serves as an audit trail.

Common Errors and Best Practices

Common errors include miscalculations, overlooking transactions, and incorrect classification of items. Best practices include regular reconciliation, meticulous record-keeping, and prompt investigation of discrepancies. Utilizing accounting software can streamline the process and minimize errors.