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Purpose of a Bank Reconciliation Process

Sayali Bedekar Patil Oct 12, 2018
Understand the purpose of a bank reconciliation process will help you avoid panic attacks and frantic phone calls to the bank when your bank statement seems to be misleading.
Bank reconciliation is the process of reconciling the bank statement balance, with the book bank account balance in the customer's (client's) books of accounts. The procedure should result in the tallying of the two balances, i.e., the adjusted bank balance calculated must equal the adjusted book bank balance figure.
The process of preparing a reconciliation statement is a structured one, where bank reconciliation forms containing pre-printed items leave omission errors out. These forms are found on the back side of your monthly bank statement hard copies and make the process a lot easier. Read further to understand the purpose of a bank reconciliation process.
The purpose of bank reconciliation is to identify and rectify divergences between the two bank balances. A divergence of the two balances can occur due to any of these two things:
  • Entries counted in the bank statement, not reflected in the account books.
  • Entries made in the books of accounts, that are yet to be known to the bank.
Some entries that get missed out in the books of accounts are:
  • Bank charges and fees directly deducted from the bank's side, are mostly only known by the business when the bank statement arrives.
  • Bank's collection of receivables, on the business's behalf, is not recorded in the books, till actual bank intimation of receipt, arrives as a bank statement.
  • Any deposits made, directly in the bank account, without intimating the business, are recorded in the bank statement, but obviously not in the account books.
  • Any interest earned on the bank balance is something that does not get calculated on the business's side, and hence does not get recorded in the books till an official intimation arrives.
  • Any errors from the bank side get noticed only after the arrival of a bank statement.
Some items recorded in the books of account, but not reflected in the bank statements, are:
  • Outstanding checks to be encashed or settled from bank's side, i.e. checks still in transit, get recorded in the books but are accepted by the bank only after the settlement is done.
  • Any bank errors, either positive or negative, sometimes get reflected in the accounts but not in the bank statement.
  • Any deposits in transit that were recorded on the account books are only recorded in the bank statement once they are cleared

The Process

The reconciliation process starts with adjusting the balance as per bank. This is done by taking the actual balance given, adding the deposits in transit and the balance increasing bank errors, and deducting any outstanding checks and balance reducing bank errors. Then come the adjustment of balance as per the books of accounts.
This is done by deducting the bank charges and fees (plus any other deductions) and any balance increasing accounting errors, and adding the interest earned, the bills receivables collected by bank and the balance reducing accounting errors.
After the balances are individually adjusted, they are compared and expected to tally. Then the process shifts to journal entries. These are necessary to incorporate the necessary corrections in the books of accounts.

The Purpose

  • Bank reconciliations prevent overspending by keeping strict accounts of cash outflows. They also check for any overcharging of fees, done on the bank's side.
  • They aid in the timely correction of bank errors. They also check duplication of transactions.
  • They help to track and correct employee errors. Regular bank reconciliations help avoid payment problems and delays due to insufficient balances.
  • It puts an active check on the embezzlement of money and ensures responsible accounting.
  • They help to reach the correct account balance figures which provide external auditors with easily verifiable documentation.
  • If the process is done regularly, it reduces accounting errors, making the finding of missing purchase and sales invoices, easy in accounting system.
  • They make it easy to identify whether the accounting errors are actual or due to a timing mismatch.
  • They allow to keep track of checks that are cashed, separate from those that are outstanding or in transit.
Basically, the purpose of bank reconciliations is to introduce efficiency and transparency into the business accounting systems. It is highly worthwhile to take time and do them, as it helps in avoiding situations like the one mentioned in the description. Nowadays, the bank reconciliation process can also be outsourced to specialist companies.