Bank Reconciliation
Questions and Answers

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Bank Statement Reconciliation

Michelle asks: What do I do if I have not deposited funds received and instead used those funds to pay suppliers directly? I can not reconcile to my bank statement.

The usual method of dealing with these kinds of transactions is with the following steps (however, it can vary depending on what bookkeeping software you are using):-

Funds Received - instead of depositing these into your 'Bank Account' in the bookkeeping software, deposit them to 'Undeposited Funds', I will explain further down what to do.

Suppliers Paid - Pay the suppliers from the 'Undeposited Funds' account. 

Then - go into the part of your bookkeeping software that allows you to deposit funds from the 'Undeposited Funds' to the 'Bank Account'. Tick the funds received, and tick the suppliers paid, this should leave you with a NIL deposit which is what you want. Deposit this NIL deposit to your 'Bank Account'. See 'Also' below if the funds received is more or less than the suppliers paid leaving you with a small balance.

Reconciling - When you perform your reconciliation, tick this NIL deposit to include it in your reconciliation - it won't affect your totals.

Now - I am assuming that you have already received the funds into your software's bank account and paid them from there because you are unable to reconcile. So you need to correct this by deleting those payments, and starting again from the first step above which is 'Funds Received'

Also - if your received funds is more(or less) than your paid funds and there is an odd balance left over, you will need to spend it from or receive it into the 'Undeposited Funds' and code it to drawings, this is so that you can tick it also which will ensure your deposit into the bank account is NIL - it must be NIL (unless you actually deposited any cash left over to your actual bank).

Jee asks: Since the bank reconciliation statement should be done on a monthly basis, say if a company has a lot of banks, is it possible to out-source the bank reconciliation to the bank itself and what are the disadvantages?

Answer: In my experience it is not possible to outsource reconciliations to banks because they do not usually offer this service.

It is however possible to outsource the task to a bookkeeper or accountant.

In order for a bank reconciliation to be done, access to the business cash book/s is required. A business with many bank accounts should have a separate cash book for each account.

I know of a lawyer who has five separate bank accounts. Bank reconciliations are performed twice a month for each using bookkeeping software.

There is bookkeeping software available, such as Xero, that has the capacity to link directly to the bank account. Every night the software automatically downloads the bank transactions into the cash book, which saves the bookkeeper a lot of time because they do not have to manually enter each transaction.

Also, many banks provide a special file that can be downloaded directly into the bank reconciliation section of the bookkeeping software so that the cash book can be automatically updated... another time saver.

Anita asks: I have an accounting problem concerning this bank reconciliation. Here is the entire scenario. I need to know how its done...can you help me?

Scenario: balance of $4,000.00
His bank statement showed a balance of $4,270.00
On comparison the following were found:
* check issued amounting to $2,500.00 has not been cashed
* the bank rejected checks amounting to $140.00
* standing order for a staples order of $700.00 was not noted.
* a customer paid $170.00 directly into the bank without any notice to us.
* bank charges of $160.00 were entered in the bank statement only.
* a dividend of $250.00 was paid directly into the bank and not recorded in the cash book
* checks for $1,650.00 were entered into the cash book and deposited in the bank but had not been cleared (deposited)

Prepare a bank reconciliation statement for the month.


Answer
:

Step One
The first thing to do is enter into the cash book any transactions that are on the bank statement but not in the cash book.

So, the starting cash book balance provided above is $4,000.00.
* add $170.00 customer payment
* add $250.00 dividend
subtotal $4,420.00

* less $700.00 standing order for staples
* less $160.00 bank charges
subtotal $860.00

Therefore, $4,420.00 take away $860.00 gives you a new cash book balance of $3,560.00

Step 2
Then you are going to add up all the outstanding withdrawals and all the outstanding deposits. This refers to all those transactions that are in the cash book, but not on the bank statement.

Outstanding Withdrawals
* un-cashed check $2,500.00

Outstanding Deposits
* un-cleared checks $1,650.00
* rejected checks $140.00
sub-total $1,790.00

Step 3
Reconciliation

* new cash book balance $3,560.00
* add: outstanding withdrawals $2,500.00
sub-total $6,060.00
*less: outstanding deposits $1,790.00

Bank Statement Balance $4,270.00


Maryam asks: If the beginning balance on the bank statement is not the same amount as the beginning balance in the cash book, for preparing the reconciliation how can we adjust the difference in the beginning balances?

Answer:

How to fix the problem depends on whether you are using book-keeping software or keeping a manual cash book. Below are suggestions for both, but first, you need to find out what caused the problem in the first place. If you have already found the problem you can skip this part.

To find the problem, you need to go through the previous month's cash book and bank statement.

(Remember that the actual bank statement will always have the right closing balance so any issues or adjustments will be found and made in the cash book or reconciliation.)

Finding the Problem 

  1. Go back through the reconciliation/cash book for the previous month and check them against the bank statement.
  2. Highlight any transactions on the statement that are missing from the cashbook, or
  3. Highlight any transactions in the cash book that are not on the bank statement.
  4. Check if the transactions from point 3 above have been included in the final part of the reconciliation for the previous month (i.e. the part that has ‘’add: outstanding withdrawals, less outstanding deposits’ – check the example on http://www.beginner-bookkeeping.com/bank-reconciliation-statements.html (This will only apply to manual bookkeeping because most bookkeeping software automatically include these entries)
  5. If the previous month has nothing wrong you may need to check further back to older months.
  6. Once you know exactly what has caused the opening balances to differ, you can move on to making the adjustments.



Bookkeeping Software 

If you are using specialized bookkeeping software (like Quickbooks, MYOB, Sage etc.) the best thing to do is call their support line and ask them to guide you through fixing the problem or search through their on-line guide for an answer. If for some reason you cannot do this, try the following:-

Step 1 : 

Undo the completed reconciliation for last month, enter in the missing transactions, redo the reconciliation but please note:- 

  • Only undo the reconciliation if you know that any adjustments made are not going to mess up sales tax calculations that may have already been made and paid to the revenue department (such as GST or VAT etc.). If you don’t know what this means then chances are you don’t have to process this kind of tax in your country so don’t worry about it! But check with your local tax department to be sure. 
  • Some bookkeeping software will lock a month that has been reconciled and so will not allow you to undo the reconciliation or make any adjustments in the previous month. In this case, do Step 2 below.

Step 2 : 

Enter the missing transactions from last month’s cash book into the current month of the cash book (use the date of the opening balance) and include them in your bank reconciliation for the current month. Even though these items are not on the current month’s bank statement you can still bring them in so that the closing balance of the reconciliation matches the bank statement. The disadvantages of this are:- 

  • Your profit and loss reports and balance sheet will not be 100% accurate for the current month or the previous month, however, the adjustments will balance out and make accurate the overall reports at the end of the financial year.
  • The closing balance of last month and the opening balance of the current month being reconciled will still be wrong, but the closing balance of the current reconciliation month will be right, which is what you want. You should write out a note explaining what occurred and attach it to the back of the bank reconciliation so that if you have to look back at it later in the year you will be reminded of how it happened and what you did to fix it.


Manual Bookkeeping 

If you are using a manual bookkeeping system i.e. a handwritten cashbook, or excel spreadsheet, you should easily be able to go back through the previous month and do the necessary adjustments to ensure the closing balance matches the bank statement. Just remember however, if you have sales tax or VAT that has already been declared for last month, then simply follow Step 2 above.


What do to if this problem occurs at the end of the financial year 

  1. If the wrong closing balance of last month happens to be the last day of the financial year and you are unable to undo the reconciliation or unlock last month to fix it, do any of the following:-
  2. Process the current reconciliation as per Step 2 above under “Bookkeeping Software” so that this month’s closing balance matches the bank statement, but make a special note to tell the accountant who processes your end of year accounts and tax. The accountant will be able to journal these transactions back into the correct financial year in his/her system for tax purposes, or
  3. Contact your bookkeeping software support line to find out what to do, or
  4. Contact your tax accountant and ask him/her what they want you to do.

Note: One of the first things an accountant does at the end of the year is to check your cash book closing balance and reconciliations against the bank statement for the final day of the end of the financial year. If there are differences on that final day, he will want to know why, so you may as well let him know up front instead of waiting for him to contact you.

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