How to Prepare Bank Reconciliation

The procedures in preparing bank reconciliation are concisely presented as follows:

a. Determine the balance per book and the balance per bank.
b. Trace the cash receipts to the bank statement to ascertain whether there are
deposits not yet acknowledged by the bank.
c. Trace the checks issued to the bank statement to ascertain whether there are checks
not yet presented for payment.
d. The bank statement should be examined to determine whether there are bank credits
or bank debits not yet recorded by the depositor.
e. Watch out for errors. Errors are reconciling items of party who committed them.

Now when all the reconciling items have already been determined, a formal reconciliation may be prepared.

There are several methods in reconciling the book balance and the bank balance. The adjusted balance method is preferred over book to bank method and bank to book method.

Under the adjusted balance method, the book balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet. The credit memos are always added to the book balance and the debit memos are always deducted from the book balance.

Deposits in transit are always added to the bank balance and the outstanding checks are always deducted from the bank balance.

These procedures are explainable due to the fact that under this method, the objective is bringing both balances to the correct amount as would appear in the balance sheet. The adjusted book balance and adjusted bank balance must balance or must arrive at the same amount.

Credit memos have already increased the cash balance per bank but have no effect on the book balance for they are not recorded yet by the depositor. Consequently, the book balance is understated hence credit memos are added to the book balance.

Conversely, debit memos have already decreased the cash balance per bank but have not been taken up in the books of the depositor. As a result, the book balance is overstated in relation to the correct cash balance. It is but logical to deduct debit memos from the book balance.

Deposits in transit have already increased the book balance but have no effect on the bank balance because the deposits are not yet taken up by the bank. The bank balance therefore is understated. To adjust it to the correct cash balance, deposits in transit are added to the bank balance.

Outstanding checks having been released already decreased the book balance however, not yet presented for payment, hence not taken up by the bank. The cash balance per bank is naturally overstated. They must therefore be deducted from the bank balance.

At this point, you can now present a schedule that accounts for the differences between an enterprise’s cash balance as shown on its bank statement and the cash balance shown in its general ledger.

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