Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

Step 2. Adjusting the Balance per Books

Step 3. Comparing the Adjusted Balances

Step 4. Preparing Journal Entries

What is a bank reconciliation?

A bank reconciliation is a process performed by a company to ensure that the company's records (check register, general ledger account, balance sheet, etc.) are correct and that the bank's records are also correct.

A Bank reconciliation is a process that explains the difference between the bank balance shown in an organization's bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records at a particular point in time.

THE PURPOSE OF THE BANK RECONCILIATION STATEMENT

Due to the timing difference,omissions and errors made by the bank or the firm itself,the balances of the bank statement and the bank account in the cash book rarely agree.

Bank reconciliation statements can be used to explain the reasons for the differences and to identify errors and omissions in both documents,so that corrections can be made as soon as possible.

REASONS FOR DIFFERENCES BETWEEN THE CASH BOOK AND THE BANK STATEMENT.

Uncredited items

They are deposits paid into the bank.These items occurred too close to the cut-off date of the bank statement and so do not appear on the statement.They will appear on the next statement.

Unpresented cheques

They are cheques issued by the firm that have not yet been presented to its bank for payment.

Standing orders

They are standing instructions from the firm to the bank to make regular payments.

Direct debits

They are payments made directly through the bank.

Bank charges

They are charges made by the bank to the company for banking services used.

Dishonoured cheques

They are cheques deposited but subsequently returned by the bank due to the failure of the drawer to pay.

Credit transfers/direct credits

They are collections from customers directly through the bank.

Prepaid ExpensesPrepaid expenses are future expenses that a business pays for in advance before it actually incurs them, such as insurance coverage for next year or rent paid for next month. Before prepaid expenses are consumed, businesses consider them assets that can provide future benefits. Prepaid expenses expire either with the passage of time or through use and consumption. In other words, prepaid expenses as assets are gradually used up as a business incurs the related expenses over time.

Prepaid RevenuesPrepaid revenues, also referred to as unearned revenues, are prepayments that a business receives from its customers for future delivery of goods or services. Following the revenue recognition principle, businesses cannot record customer prepayments as recognized revenues until sales to customers are completed. Examples of prepaid revenues include airline ticket sales before flight services or school tuition received during registration. Holding customer payments, a business is liable for the future transfer

of goods or serves. Thus, prepaid revenues are liabilities for businesses, and become earned revenues over time as they complete the intended sales.

Prepaid income is revenue received in advance but which is not yet earned. Income must be recorded in the accounting period in which it is earned.