Mastering Bank Reconciliation: A Comprehensive Step-by-Step Guide

Bank Reconciliation

Bank reconciliation explains the difference between the bank balance shown in an organization’s bank statement and the corresponding amount shown in the organization’s accounting records, on a particular date.

A bank reconciliation is a matching of the transactions on your bank statement to the transactions in your general ledger. Bank reconciliations are performed for all BANK ACCOUNTS as well as all CREDIT CARDS.

In our modern business, Maximum transactions are made through Banks.

To route any transaction through Bank, A Person must open an Account in Bank.
A Businessmen opens a Current A/c in Bank for all Business Transactions.
This A/c is opened with the name of his/her firm.

Mastering_Bank_Reconciliation_A_Comprehensive_Step-by-Step_Guide

If the balance shown by the pass book is different from the balance shown by bank column of cash book, the business firm will identify the causes for such difference. It becomes necessary to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement is prepared. This statement is called the ‘Bank Reconciliation Statement.

Definition of Bank reconciliation

In the business world, control of cash is facilitated by depositing cash sales and other receipts into the current bank account and ensuring that all payments are made by cheque or electronically. This makes it easy to verify the balance on the Bank Statement (an external document) with the Bank account (internal record).

A bank reconciliation is the process of comparing the transactions appearing in a bank statement with the accounting records of the bank account of the company. The process involves matching the amounts from the bank statements to the company bank account records and from the company bank account records to the bank statements to ensure that they are accurate and consistent. Any differences or errors need to be fixed and reconciled for the bank reconciliation to balance.

Bank reconciliation takes place when the business compares its record of transactions and balances (CRJ and CPJ) to the bank’s record of transactions and balances (Bank Statement). Bank reconciliation is an essential control process that should be performed every month. The bookkeeper must meticulously go through every transaction in their CRJ and CPJ to make sure their transactions and the bank’s transactions agree.

Step 1: Identify outstanding deposits and bank errors that need to be added to the current bank statement balance.
Step 2: Identify outstanding checks and bank errors that need to be subtracted from the current bank statement balance.
Step 3: Identify amounts collected by the bank (notes), amounts added to our balance by the bank (interest on account), and any errors made by the company, when recording the transactions, that need to be added to the current book balance.
Step 4: Identify bank service charges, NSF checks, and any errors made by the company that need to be subtracted from the current book balance.

In simple words is Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and pass book on any given date.

Bank reconciliation purpose and process

A Bank Reconciliation Statement is a valuable internal tool that helps companies compare their accounting records’ balance with their bank account balance. Here’s how it works:

Purpose: The statement identifies discrepancies between the two balances and ensures that payments were processed correctly and cash collections were deposited into the bank account.
Process:

Comparison: It summarizes banking and business activity, including deposits, withdrawals, and other transactions affecting the bank account during a specific period.
Adjustments: Any discrepancies lead to necessary adjustments or corrections.
Error Detection: It catches simple errors, duplications, and accidental discrepancies that could impact financial and tax reporting.
Fraud Detection: It’s effective for detecting fraud, theft, and loss. For instance, if a check is altered, the payment made for that check may be larger than expected. Detecting this during reconciliation allows you to take corrective measures.
Risk Management: Accurate financial statements help with organizational planning and critical business decisions.

An Important mechanism of internal control

The reconciliation will bring out any errors that may have been committed either in the cashbook or in the passbook.
Any undue delay in the clearance of cheques will be shown up by the reconciliation.
A regular reconciliation discourages the accountant of the Bank from embezzlement of funds. There have been many cases when the cashiers merely made entries in the cashbook but never deposited the cash in the Bank; they were able to get away with it only because of lack of reconciliation.
It helps in finding out the actual or true position of the Bank balance by in corporating the effect of any uncleared funds as well.

Reasons for difference

When a businessman compares the Bank balance of its cash book with the balance shown by the bank pass book, there is often a difference. As the time period of posting the transactions in the bank column of cash book does not correspond with the time period of posting in the bank pass book of the firm, the difference arises. The reasons for difference in balance of the cash book and pass book are as under:

Cheques Issued by The Firm but Not Yet Presented for Payment: When cheques are issued by the firm, these are immediately entered on the credit side of the bank column of the cash book. Sometimes, receiving person may present these cheques to the bank for payment on some later date. The bank will debit the firm’s account when these cheques are presented for payment. There is a time period between the issue of cheque and being presented in the bank for payment. This may cause difference to the balance of cash book and pass book.
Cheques Deposited into Bank but Not Yet Collected: When cheques are deposited into bank, the firm immediately enters it on the debit side of the bank column of cash book. It increases the bank balance as per the cash book. But the bank credits the firm’s account after these cheques are actually realized. A few days are taken in clearing of local cheques and in case of outstation cheques few more days are taken. This may cause the difference between cash book and pass book balance.
Amount Directly Deposited in The Bank Account: Sometimes, the debtors or the customers deposit the money directly into firm’s bank account, but the firm gets the information only when it receives the bank statement. In this case, the bank credits the firm’s account with the amount received but the same amount is not recorded in the cash book. As a result, the balance in the cash book will be less than the balance shown in the Pass book.
Bank Charges: The bank charge in the form of fees or commission is charged from time to time for various services provided from the customers’ account without the intimation to the firm. The firm records these charges after receiving the bank intimation or statement. Example of such deductions is: Interest on overdraft balance, credit cards’ fees, outstation cheques, collection charges, etc. As a result, the balance of the cash book will be more than the balance of the pass book.
Interest and Dividend Received by the Bank: Sometimes, the interest on debentures or dividends on shares held by the account holder is directly deposited by the company through Electronic Clearing System (ECS). But the firm does not get the information till it receives the bank statement. As a consequence, the firm enters it in its cash book on a date later than the date it is recorded by the bank. As a result, the balance as per cash book and pass book will differ.
Direct Payments Made by the Bank on Behalf of The Customers: Sometimes, bank makes certain payments on behalf of the customer as per standing instructions. Telephone bills, rent, insurance premium, taxes, etc. are some of the expenses. These expenses are directly paid by the bank and debited to the firm’s account immediately after their payment. but the firm will record the same on receiving information from the bank in the form of Pass Book or bank statement. As a result, the balance of the pass book is less than that of the balance shown in the bank column of the cash book.
Dishonour of Cheques/Bill discounted: If a cheque deposited by the firm or bill receivable discounted with the bank is dishonoured, the same is debited to firm’s account by the bank. But the firm records the same when it receives the information from the bank. As a result, the balance as per cash book and that of pass book will differ.
Errors Committed in Recording Transactions by the Firm: There may be certain errors from firm’s side, e.g., omission or wrong recording of transactions relating to cheques deposited, cheques issued and wrong balancing etc. In this case, there would be a difference between the balances as per Cash Book and as per Pass Book.
Errors Committed in Recording Transactions by the Bank: Sometimes, bank may also commit errors, e.g., omission or wrong recording of transactions relating to cheques deposited etc. As a result, the balance of the bank pass book and cash book will not agree.

Causes of Difference

Transactions recorded in Cash Book but not in Pass Book.
Transactions recorded in Pass Book but not in Cash Book.
Other transaction errors:

Error in totalling or balancing of Cash Book.
Transactions recorded twice in Cash Book.
Transactions recorded twice in Pass Book.
Error of recording by wrong amount.
Error of recording in wrong side like Debit instead of credit and vice-versa.

Mastering Bank Reconciliation a Step-by-Step Guide

Gather Statements - Collect your bank statements and accounting records for the period you want to reconcile. Ensure you have the latest statements and all relevant financial documents.
Match Transactions - Compare your bank statement with your accounting records. Match each transaction, including deposits, withdrawals, and bank fees. Tick off items that match on both records.
Identify Discrepancies - Look for any discrepancies between your bank statement and accounting records. Common issues include missing transactions, incorrect amounts, and duplicate entries.
Investigate Discrepancies - Investigate the reasons for discrepancies. Check for errors in data entry, timing differences, and outstanding checks or deposits that haven’t cleared yet.
Adjust Entries - Make necessary adjustments in your accounting records to correct errors. This could involve adding missing transactions, correcting amounts, or removing duplicates.
Reconcile Balances - After making adjustments, ensure the adjusted bank statement balance matches your adjusted accounting records balance. Both should now be in sync.
Document and Review - Document your reconciliation process, noting any significant findings and adjustments. Review the reconciliation to ensure all discrepancies are resolved.
Update Accounting – Records Update your accounting system with the reconciled balances. Ensure all transactions are accurately recorded and reflect the true financial position.
Regular Reconciliation - Make bank reconciliation a regular habit monthly or quarterly. Consistent reconciliation helps maintain accurate financial records and prevents future discrepancies.

Bank Reconciliation Statement Format

Bank Reconciliation Statement as at ………………

Particulars	Add / Less	Amount (Rs.)
Balance per depositor’s book or balance (Dr.) per bank statement		***
Add:
1. Cheques issued but not presented to bank in time	Add	***
2. Interest on bank deposit	Add	***
3. Notes receivable, Interest on securities, dividend, insurance claims etc. collected by bank	Add	***
4. Transactions credited to depositor’s book but not debited to bank statement	Add	***
5. Transactions credited to bank statement but not debited to depositor’s book	Add	***
Less:
1. Notes receivable, cheques deposited into bank but not collected	Less	***
2. Bank charges, interest on overdraft not yet credited in depositor’s book	Less	***
3. Cheques, notes receivable deposited into bank for collection but returned dishonoured, not yet credited to depositor’s book	Less	***
4. Notes payable, Insurance Premium, share instalments etc. paid by the bank but not yet recorded in depositor’s book	Less	***
5. Items already debited to depositor’s book but not credited Bank statement	Less	***
6. Items already debited to bank statement but not credited to depositor’s book	Less	***
Balance per depositor’s book or Bank statement		***

Causes of Difference

Transactions recorded in Cash Book but not in Pass Book.	Transactions recorded on Pass Book but not in Cash Book.
1. Cheques issued but not presented for payment in the bank	1. Interest allowed by the Bank
2. Cheques deposited or paid into the bank for collection but not yet credited by bank	2. Interest on overdraft, bank charges and commission etc. charged by Bank
3. Cheques deposited but dishonoured	3. Direct deposit by the customer into Bank
4. Wrong Debit or Credit entered	4. Interest, dividend etc. collected by the Bank

Bank Overdraft

C C= Cash Book showing Credit balance
P D= Passbook showing Debit Balance

Bank Balance

C D= Cash Book showing Debit balance
P C= Passbook showing Credit Balance

Method of Preparing Bank Reconciliation Statement

There are two main methods of preparation of Bank Reconciliation Statement:
Mathematical method or Add-less method.
Accounting method or debit-credit column method.

Example:

Bank column of the cashbook of Shri Rana shows a credit balance of Rs. 7500/- as on 31-03-2023. By comparing passbook and cashbook the following information is obtained. From this, prepare a bank reconciliation statement of Shri Rana.

A cheque of Rs. 15,000 is deposited in a bank on 28-03-2023 but still it is not recorded in passbook by bank.
Interest of Rs. 60 credited by bank on 30-03-2023 is not recorded in cashbook.
Rs. 18,000 was deposited in bank account directly by a customer, the information is not received up to 31-03-2023.
Cheque deposited with bank but not recorded in cashbook Rs. 15,000
Cheque issued and paid by the bank, left unrecorded in cashbook Rs. 9,000
A bill receivable discounted with the bank is dishonoured and for the same bank has recorded Rs. 18,000 with noting charges in passbook. Mr. Rana is ignorant of this.
By mistake total of the receipt of side of cashbook, is less by Rs. 3,000
A cheque of Rs. 3,000 is issued but yet not presented for payment in bank.
A cheque of Rs. 6,000 is deposited in bank but still bank has not credited the same.
Bank commission of Rs. 60 is debited by bank, but not recorded in cashbook.

Solution

Bank Reconciliation Statement of Shri Rana as on 31.03.2023

Sr. No.	Particulars	Amount (Rs.)	Amount (Rs.)
1	Credit balance of bank account as per cashbook i.e. bank overdraft		(-) 7,500
2	Add:(+)
3	Interest credited by bank remains unrecorded in cashbook	60
4	Direct deposit by customer in bank	18,000
7	Cheque deposited but left unrecorded in cashbook		(+) 39,060
8	Total of receipt of a cashbook is under cast	15,000	(+) 31,560
	Cheque issued but not presented to the bank	3,000
1	Less:(-)
5	Cheque deposited but not credited by bank	3,000
6	Cheque issued but unrecorded in cashbook
9	Dishonour of a discount
10	Cheque deposited but not credited by bank
	Bank commission debited by bank remains unrecorded in cashbook	15,000	(-) 48,090
		9,000	(-) 16,530
	Debit balance of bank account as per passbook i.e. bank overdraft	18,030

Steps for BRS in SAP

Upload Bank Statement: Use T-Code FF6B to import the electronic bank statement into SAP.
Process Bank Statement: Use T-Code FEBAN to process the uploaded bank statement, ensuring all transactions are correctly posted.
Clear Bank Statement Items: Use T-Code FEBP to manually clear any unmatched or partially matched bank statement items.
Automatic Clearing: Use T-Code F.13 to automatically clear open items in the system, streamlining the reconciliation process.
Review and Adjust: Use T-Codes FBL3N and FS10N to review G/L account line items and balances, making any necessary adjustments.
Generate Reports: Use T-Codes FF_6 and other relevant reporting tools to generate cash position and reconciliation reports for review.

Steps for BRS in Quick Books

Gather the Bank Statement from client.
Check the Beginning balance and Ending balance.
Enter the current month Last date. Ex. 31st Dec.
Reconcile the Deposits with the Bank Statement.
Reconcile the Payments with the Bank Statement.
Beginning balance less payments add deposits.
Check the Total amount should be 0.
If it is 0. Check the Reconciliation Report – Summary.
If it is not 0. But having Amount means check the unidentified transactions.
Reasons could be Unidentified Receipts, delayed payments, delayed checks, refunds, Duplicate transactions, bank charges, other charges, etc.
Those mismatches amounts should be Carry forward to next month. Mention the comments for Audit.
Ask the client for Invoice to reconcile the pending.

Step by step guide to the Automate BRS

Select Appropriate Software: Choose accounting software or dedicated bank reconciliation software that fits your business needs. Examples include QuickBooks, Xero, Sage, and specialized solutions like Blackline and Recon Art.
Integrate with Bank Accounts: Ensure your chosen software can integrate directly with your bank accounts for automatic data import. This often involves providing the software with read-only access to your online banking.
Set Up Rules and Categories: Define rules for categorizing transactions automatically. For example, recurring payments and deposits can be automatically matched based on amount, date, and description.
Import Data: Import transactions from both the bank statement and the company’s cash book into the software. This can often be done automatically or by uploading statement files.
Automatic Matching: The software will automatically match bank transactions with those in your accounting records based on predefined rules. Transactions that match exactly are reconciled automatically.
Review Exceptions: Review any unmatched or partially matched transactions manually. The software typically flags these for review, allowing you to investigate and resolve discrepancies.
Generate Reconciliation Report: Once all transactions are matched or reviewed, generate the bank reconciliation statement. The software will compile this report, showing any outstanding items and adjustments made.

Bank Reconciliation Statement Roll Forward Format

Starting Point:

Book Balance (Cash per Company Records)

Add:

Deposits in Transit – Deposits recorded in books but not yet reflected by the bank.
Interest Income – Interest credited by the bank but not yet recorded in the company’s books.
Bank Collections – Amounts collected by the bank on behalf of the company (e.g., customer payments, notes receivable).

Less:

Outstanding Checks – Checks issued by the company but not yet cleared by the bank.
Service Charges – Bank fees not yet recorded in the company’s books.
NSF (Non-Sufficient Funds) Checks – Customer checks that bounced and were reversed by the bank.

Adjusted Book Balance = Adjusted Bank Balance

This process “rolls forward” your cash balance to ensure that both bank and book figures reconcile at period end.

Bank Reconciliation Statement (BRS) – Key Challenges

No.	Challenge	Description
1	Duplicate Transactions	Occur when the same entry is recorded more than once in the company’s books or appears twice in the bank statement, leading to overstated balances.
2	Missing Transactions	Transactions appearing in the bank statement but missing in the company’s books (or vice versa), such as direct deposits, bank charges, or interest.
3	Uncleared Checks	Checks issued by the company that have not yet been presented or cleared by the bank, causing temporary differences in balances.
4	Bank Errors	Mistakes made by the bank, such as wrong entries, incorrect amounts, or processing errors that affect the account balance.
5	Book Errors	Errors in the company’s accounting records, like wrong postings, transposition errors, or omission of entries, that lead to reconciliation differences.

Bank Reconciliation Statement (BRS) – Checklist

No.	Item	Purpose / Description
1	Bank Statement	Obtain the latest statement from the bank for the reconciliation period.
2	Sub-Ledger (Reports)	Review supporting ledgers related to cash and bank accounts.
3	Cash Book (Client Books)	Verify the company’s internal record of cash and bank transactions.
4	Bank Deposit Slips	Cross-check deposits made during the period with the bank statement.
5	Withdrawal Slips	Verify cash withdrawals or fund transfers recorded correctly.
6	Cancelled Checks	Confirm cleared checks and identify any duplicate or unprocessed items.
7	Backup Data – Manual or System	Maintain backup of accounting records for verification or audit trail.
8	Deposit Matching	Match deposits recorded in books with those appearing in the bank statement.
9	Withdrawal and Payment Matching	Match issued checks and withdrawals with bank records.
10	Outstanding Checks	List checks issued but not yet cleared by the bank.
11	Deposits in Transit	Identify deposits recorded in books but not yet credited by the bank.
12	Bank Errors	Detect and adjust any errors made by the bank.
13	Book Errors	Detect and correct errors in the company’s accounting records.
14	Bank Charges	Record service charges, fees, or penalties shown in the bank statement.
15	Interest Income	Record any interest credited by the bank but not yet entered in the books.
16	Calculate Adjusted Balances	Compute adjusted bank and book balances to ensure reconciliation.
17	Document Reconciliation	Prepare and retain the reconciliation statement with all supporting documents.
18	Review Process	Review reconciliation for accuracy and obtain approval if required.
19	Secure Documentation	File and store reconciled records safely for audit and compliance purposes.

What are the Journal Entries in BRS?

Outstanding Checks: When checks issued by the company have not yet been presented to the bank

Debit: Outstanding Checks (or Accounts Payable, if not previously recorded)
Credit: Bank Account

Deposits in Transit: When deposits made by the company have not yet been recorded by the bank

Debit: Bank Account
Credit: Deposits in Transit (or Accounts Receivable, if not previously recorded)

Bank Charges and Fees: When the bank charges fees for services or transactions

Debit: Bank Service Charges (Expense)
Credit: Bank Account

Interest Earned: When interest is earned on the company's bank account

Debit: Bank Account
Credit: Interest Income (Revenue)

NSF (Non-Sufficient Funds) Checks: When checks received by the company bounce due to insufficient funds in the payer's account

Debit: Accounts Receivable (or Customer's Name)
Credit: Bank Account

Errors: When errors are identified in the bank statement or the company's records

Debit/Credit: Bank Account (or Cash Book Account)
Credit/Debit: Relevant Account (depending on the nature of the error)

Reconciliation Adjustment: To adjust the company's cash book balance to match the adjusted bank balance

Debit/Credit: Cash Book Account (to increase or decrease the balance to match the adjusted bank balance)
Credit/Debit: Bank Account

SAP T-codes for the BRS

Key SAP T-Codes for Bank Reconciliation Statement (BRS)

FF67 - Manual Bank Statement
FEBA - Posting Electronic Bank Statement
FEBAN - Bank Statement Overview
FEBP - Process Bank Statement Items
FF.5 - Foreign Exchange Revaluation
FF68 - Manual Account Statement
FF6B - Import Electronic Bank Statement
FF_6 - Cash Position
FEBC - Display Log for Bank Statement Processing
F.13 - Automatic Clearing
FB05 - Post with Clearing
FBL3N - G/L Account Line Items
FS10N - G/L Account Balance Display
FAGLL03 - G/L Account Line Items (New)
F-28 - Post Incoming Payments
F-53 - Post Outgoing Payments

Advantages of Bank Reconciliations

Advantages of preparing a bank reconciliation include:

Errors can be identified and corrected at an early stage;
Reduces the risk or fraud and theft;
Stale cheques can be identified; and
Ensures that the bank account in the financial statements is correct.

FAQ's

How to reconcile bank accounts?

To reconcile bank accounts, compare your bank statement to your records, noting any discrepancies. Adjust your records to match the bank statement, considering deposits, withdrawals, fees, and errors. Reconciling ensures accurate financial records.

What are the three methods of preparing bank reconciliation?

The three methods of preparing a bank reconciliation are the Adjusted Balance –

adjustments are made directly to the balance; the Bank Statement
where adjustments are made to the bank statement balance; and
the Balance Sheet Method reconciling discrepancies between the bank and book balances.

How often should you reconcile your bank account?

Reconciling your bank account should be done monthly to catch discrepancies early and keep financial records accurate. Businesses with high volume of transactions must reconcile their bank statements weekly or daily to manage cash flow efficiently.

What is Deposit in transit?

Deposits in transit are amounts that have been received and recorded by a company but have not yet been recorded by the bank. These deposits are typically checks or cash that the company has received and logged in their accounting records but are still on their way to the bank or are being processed by the bank. They are also known as outstanding deposits.

What are Outstanding Checks?

Outstanding checks are checks that have been written and recorded in the company's books but have not yet cleared the bank. These checks are considered outstanding because they have not yet been cashed or deposited by the payee, and thus have not been reflected in the bank's records. Outstanding checks are a common reconciling item when performing bank reconciliations.

What is NSF (Non-Sufficient Funds) Checks?

NSF (Non-Sufficient Funds) checks, also known as bounced or returned checks, occur when a check is written for an amount greater than the available balance in the payer's bank account. When a bank receives an NSF check, it does not process the payment and returns the check to the depositor, often with a fee. NSF checks require careful handling in a company's accounting records to ensure accurate financial reporting and bank reconciliation.

What are Bank collections?

Bank collections involve a bank acting as an intermediary to collect payments on behalf of its customers. This service is essential for businesses that receive payments through various channels and need efficient methods to process and reconcile these payments.

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Mastering Bank Reconciliation: A Comprehensive Step-by-Step Guide