RECONCILING YOUR BANK STATEMENTS

Do you maintain a proper BOOKKEEPING? Do you have a BOOK or LEDGER where you maintain the records of your bank transactions? It is important and normal for Companies to carry out a monthly Bank Reconciliation. It is also important for individuals to do the same. You can not carry/perform Bank Reconciliation if you do not maintain a BOOK/RECORD/LEDGER where you record all your bank transactions. You should not rely only on the BANK STATEMENTS.

Before I explain what BANK RECONCILIATION is, let us first understand the circumstances that will lead to a BANK RECONCILIATION. When you open an ACCOUNT with a BANK, the Bank will open a RECORD for your ACCOUNT. This is where they will record all the MONEY you (or your Customers/Partners) pay into the ACCOUNT and all the MONEY you (or your Vendors/partners) withdraw from the ACCOUNT. At the end of each month (or Period) they will furnish you the Report of all Transactions you carried out in that account through BANK STATEMENTS.

As a proper Business Owner/Company or Individual, you are supposed to maintain your own records of all the transactions you have carried out during that Month or Period. All things being equal, the Balance of Fund as recorded in your BOOKS/LEDGERS should be the same as that Recorded by the BANK in the BANK STATEMENTS. If they are not the same thing then there could be some discrepancies somewhere. The reasons for these differences could be;

1. Cheques/Direct Transfers (Online or ATM) you gave or made out to Vendors (or Partners/Third Parties). You have recorded these Cheques/Direct Transfers as Payments you made out of your Bank Account but the Beneficiaries are yet to go to the Bank to Cash the Cheque or the Bank Network is yet to affect the Transfer. This is what may be known as UNPRESENTED CHEQUES/UNCAPTURED DEBITS. It is also possible that the Cheques have been Presented but the Bank did not honor the Cheque or the Transfer was REVERSED. It is what we call DISHONORED CHEQUES/TRANSFERS. Thus, these become RE-CONCILIATING ITEMS. 

2. Cheques/Lodgements/Direct Transfer that you have paid into the Bank (or your Customers/Partners paid into your Bank account). You have recorded these MONIES as an Inflow in your BOOKS but the Bank is yet to Credit Your Bank Account either due to Network issues or Clearing Delays. This is what we use to call UNCREDITED CHEQUES/LODGEMENTS. Thus, these become RE-CONCILIATING ITEMS.

3. Bank Charges/Interest Charges/VAT that the Bank charged that may not be known to you until the Bank Statements are furnished to you. In the case of some Accountants, the Management may make a Payment which you may not be aware of. In some small businesses, the Owner makes some direct transfers without going through the Accountant and as such the Accountant may not be aware of such payments and the Owner may forget to communicate the same. These Payments are only known when the Bank Statements are available. These are known as PAYMENTS IN THE BANK STATEMENTS ONLY. Thus, these are RE-CONCILIATING ITEMS.

4. A Customer/Partner may make a Direct Transfer (or Lodge Money) into your Bank Account. He or She may forget to inform you and as such you may not be aware of such Receipts. These Receipts are only captured by the Bank and reflected in the Bank Statements. As at the time of the BANK RECONCILIATION, you may only be aware through the Bank Statements. Thus, these become RE-CONCILIATING ITEMS. 

5. There could be errors in the Bank Book which you have maintained.

6. There could be errors in the Bank Statements which the Bank has maintained. 

With the above in mind, you are set to Reconcile the Difference between the Balances in your BANK BOOK (which you recorded) and the Balances in the BANK STATEMENTS (which the Bank recorded). Thus, Bank Reconciliation is the process of ensuring that the Balances of Fund as shown in the Bank Statements as at the end of a Particular Period is the same as the Balances of Fund as shown in the Bank Books as at the end of the same period. This process is carried out by Preparing a Bank Reconciliation Statement. The Statement shows the Balance of the Bank Book, the Transactions that may have caused the differences, and the balance of the Bank Statement. When preparing the Statement, you can start from the BANK BOOK BALANCE or the BANK STATEMENT BALANCE and ADJUST for whatever transaction(s) that would have caused the differences. 

It is advisable that this should be done on a monthly basis depending on how large your transactions are and the number of staff to carry out this task.  

Preparing Bank Reconciliation Statements are important for the following reasons;

1. Check if there are errors in your Bank Statements and quickly notify the Bank
2. Check if there are errors in your Bank Books and quickly resolve them so as not to make wrong cash flow decisions.
3. Enable you to have proper and correct Bookkeeping entries.
4. Mitigate against unknown/excess Bank Charges
5. Keep You at par with your Bankers always

The benefits of preparing Bank Reconciliation Statements are numerous. Just know that it saves you more when you do so. 

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You may need to read our article on HOW TO PREPARE A BANK RECONCILIATION STATEMENT