1.The definition of RECONCILIATION

The word RECONCILIATION means ‘to come to an agreement. This happens even to people. If they had a disagreement on some issue and then later they come to an agreement. We can say that they have reconciled.

Similarly, in financial terms, where the same transaction is recorded in two different places, we expect the same results at both ends. However, at times the result may not be the same for various reasons. Hence the need to have the results at both ends reconciled.

Bank reconciliation therefore entails reconciling the cashbook balance to the bank statement balance. 2. Some of the timing differences that causes the two balances to differ: ‐

(a) Depositsmadebutnotrealized (b) Chequesissuedbutnotpresented (c) Direct Debits

  •   Bank charges – usually the cash book only takes note of these when the bank statements are received.
  •   Stop orders – these are indicated on the bank statement and the cashbook can only be updated after receipt of the bank statement
  •   Dishonored cheques – if we don’t receive the cheque from the bank, we can know about it when we receive the bank statement. – This occurs when a client has insufficient funds in the account or missing signatures in cases of two signatories etc.(d) DirectCredits

 ‐Direct deposits or DDACC to the business account – these payments can only be known

after receipt of a bank statement or if customer gives a transmission copy. Eg payment for rent can be paid directly into our account by the tenant.

3. Step by Step Procedure ‐Bank reconciliation process

  1. First, we should have a base reconciliation i.e. a previously reconciled position.
  2. Clear all outstanding items from base reconciliation and pick up the left overs to thenew bank reconciliation
  3. Compare deposits as per cash book to the bank statement
  4. Compare payments as per cash book to the bank statement
  5. Pick up the left overs from item 3 and 4 to the reconciliation
  6. Identify direct debits and credits from bank statement to the reconciliation or ensurethey are recorded in the cash book.

4. Action to be taken

  1. Reconciling item due to timing differences (deposits made not realized and cheques issued not presented). – no action necessary
  2. Direct debits and direct credits – the action is to update/enter in the cashbook.
  3. Errors in the cashbook – rectify errors in the cashbook
  4. Errors in the bank statement – follow up with the bank/ write letters and get it rectified in thebank statement.
  5. So why should we carry out bank reconciliations?
  1. (a)  Well the purpose of preparing a bank reconciliation is to detect any discrepancies between the accounting records and the bank besides the ones stated above.
  2. (b)  It helps in the identification of errors in the accounting records of the company or the bank statements.
  3. (c)  Cash is the most vulnerable asset of any organization. Bank reconciliations provide the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals. It is necessary to segregate duties of persons responsible for accounting and authorizing of bank transactions and those responsible for preparing and monitoring bank reconciliation statements
  4. (d)  Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business
  5. (e)  If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance, it provides added comfort that the bank transactions have been recorded correctly in the company records.