The balance appearing in company’s bank ledger is of DEBIT nature as it represent company’s assets that is recoverable from bank. On the other hand, same balance appears as CREDIT balance in bank statement as bank’s payable bank towards the Company. Ideally both figures should match. However, in practice, a Company’s bank balance as per bank account ledger and the balance appearing in bank statement do not match at a particular time. This can be due to various factors including:
- Unrepresented cheques – the cheques which have been issued by the Company (and credited in the bank account ledger) but not yet presented to the bank for enmeshment by the payee
- Uncleared amounts i.e. the cheques which have been booked by the company as receipt (debited in the bank account ledger) but not yet cleared by the bank (and credited in company’s bank statement)
- Unidentified receipts – the amounts which have been deposited in company’s bank accounts by a customer (appearing in bank statement) but company doesn’t know about such receipt (and is missing in company’s bank ledger)
- Any bank charges deducted by bank and not yet recorded in company’s books of accounts
- Any interest income credited by bank but not yet recorded in company’s books of accounts
Bank reconciliation statements are prepared to identify and reconcile above differences at a particular date.
Consider following extracts from bank ledger (picture-1 below) and bank statement (picture-2 below).
As you can see, balance as per ledger is not matching with closing balance as per bank statement. In order to reconcile the two balances we need to follow following steps:
- Review all debits in bank ledger and tick them against credits in the bank statement
- Review all credit in bank ledger and tick them against debits in the bank statement
Now what we are left with are the reconciling items at closing date. Bank reconciliation statement would be as follows:
Alternatively, the reconciliation can be made in reverse order by reconciling bank statement balance to the ledger balance.