Bank Reconciliation Statement
Bank Reconciliation Statement is a statement that depositors prepare to
find, explain and understand any differences between the balance in bank
statement and the balance in their accounting records.
All transactions between depositor and the bank are entered separately by
both the parties in their records. These records may disagree due to various
reasons and show different balances. The purpose of preparing a bank
reconciliation statement is to find and understand the reasons of this difference
in account balance.
Reasons of difference between bank records (bank statement) and
depositor's accounting record:
Usually, the balance on the monthly bank statement does not agree with the
depositor's accounting record. The usual reasons of this disagreement are
explained below:
Outstanding checks:

(also known as unpresented checks and uncleared checks) are the
checks that have been issued by the company to a creditor but have
not yet been presented for payment. The amount of these checks are
recorded by the company but no entry is made by the bank before the
end of the month.
Example:
You issued a check to Mr X (one of your creditors) for 5,000.00 on January 29,
2020 and entered it immediately in your accounting records. Mr. X did not
present or deposit that check in his account before the end of January. Your
bank statement for the month of January would not show the entry for that
5,000.00 because Mr. X did not present this check before the end of January.
It would create a difference of 5,000.00 between the balance in your
accounting records and the balance in the bank statement.
Deposit in transit:

Deposit in transit means the cash received from a party has been
recorded by the depositor but has not been entered by the bank in the
bank statement. It usually occurs on the last day of the month.
Example:
You received 8,000.00 from Mr. Y (one of your debtors) on 31 January 2020 and
recorded it immediately in your accounting records. You then sent this cash to
your bank to be deposited into your account but it reached too late to be
entered in your bank statement for the month of January. The balance in your
accounting record would be different from your bank statement.
Credits for interest earned:

Banks pay interest on some accounts. If this interest is credited in the
depositor’s account without intimating to the depositor, the bank
statement and the depositor’s record will not agree.
Credit Memos:
 Refers to items not representing deposits credited by the bank to the
account of the depositors but not yet recorded by the depositors as
cash receipts.
Typical examples of credit memos are:
- Notes receivable collected by the bank in favor of the depositor and
credited to the account of the depositor.
- Proceeds of bank loan credited to the account of the depositor.
- Matured time deposits transferred by the bank to the current account
of the depositor.
Debit Memos:
 Refers to items not representing checks paid by bank which are charged
or debited by the bank to account of the depositor but not yet recorded
by the depositor as cash disbursement. The debit memos have the effect
of decreasing the bank balance.
NSF Checks:
Stands for Not Sufficient Funds. When a customer deposits a check in his
account, the bank immediately credits his account with the amount of
the check. Sometimes such checks are not honored because the person
issuing the check does not have sufficient funds in his account. In such
situation, the bank reduces the balance of the customer. The
dishonored check is returned to the depositor as NSF check.
Example:
You received a check from Mr. X for 5,000. You entered it immediately in
your accounting records and deposited the check into your account. After
depositing the check, your bank immediately credited your account by
1,000. Afterward your bank told you that Mr. X’s bank did not honor the
check because there were not sufficient funds in his account. Your bank
reduced your account by 1,000 and returned the dishonored check of
1,000 to you as NSF check. The balance in your accounting records will differ
from the balance in your bank statement.

Bank Service Charges:

Banks provide various services to its customers and deduct service
charges from their accounts. The depositors usually are not aware of
such deductions. These charges create a difference of balance
between bank statement and the depositor’s record.
Steps in preparing a bank reconciliation statement:

Step 1 – Find the deposits in transit: The first is to see if one or more
deposits are in transit. You can do so by comparing the deposits in your
accounting record with the deposits shown in your bank statement. If
you find a deposit in your accounting record that has not been shown
in the bank statement, it means that deposits is in transit.
Add to the bank statement balance all deposits that are in your
accounting record but have not been entered in the bank statement.

Step 2 – Find outstanding/unpresented checks and deduct from bank
statement balance: Find all checks that you have issued but have not
been presented for payment. You can do so by comparing the checks
issued in your accounting record with the checks paid in your bank
statement. If your accounting record shows that a check has been
issued and your bank statement does not show a corresponding entry
for that check, it means it is an outstanding or unpresented check.
Deduct from the bank statement balance all the checks that you have
issued and entered in your accounting record but have not been paid
by the bank.

Step 3 – Find and add credit memorandum to your accounting record:
Bank issues a credit memorandum when it collects a note receivable on
behalf of the depositor. Find if there is any credit memorandum issued
by the bank that you have not entered in the accounting record.
Add to your accounting record any credit memorandum not entered in
your accounting record.

Step 4 – Find and deduct debit memorandum from your accounting
record: Bank provides various services to its depositors such as printing
checks, processing NSF checks and collecting notes receivables etc.
Bank deducts charges from depositor’s account for these services and
intimates him or her about such deductions by issuing a debit
memorandum. Find any debit memorandum not recorded in your
accounting record.
Deduct from your accounting record any debit memorandum issued by
the bank but not entered in the accounting records.


Step 5 – Are the adjusted balances equal? See whether adjusted
balanced of your accounting record is equal to the adjusted balance
in your bank statement.
Step 6 – Make appropriate journal entries: The final step in a bank
reconciliation is to prepare appropriate journal entries for the items you
have not recorded yet in your accounting records.