Bank Reconciliation
What is bank reconciliation?
In bank reconciliation, a business's internal records for a selected period are compared with the corresponding bank statement. The purpose is to explain differences between the two balances and to identify, investigate and correct discrepancies in the accounting records. It aims to trace identified differences to their causes and provide a clearer view of the business’s actual bank balance. The outcome is documented in a bank reconciliation statement (BRS).
Why is bank reconciliation important?
Bank reconciliation helps keep the recorded cash balance aligned with the bank’s record. It brings unrecorded transactions, such as bank charges, interest and direct debits, into the books before financial statements are prepared.
Beyond internal accuracy, reconciliation also supports statutory compliance.
CARO 2020 also makes bank reconciliation a compliance concern. Clause 3(ii)(b) applies when sanctioned working-capital limits from banks or financial institutions exceed ₹5 crore against current assets. In such cases, the auditor must check whether quarterly returns filed with those lenders agree with the books of account. Accurate bank reconciliation is a core control that supports this.
How does bank reconciliation work?
These steps are followed in a bank reconciliation:
1. Comparing the cash book and bank statement balances
The process begins by placing the cash book's bank column balance and the bank statement balance for the same date side by side. A mismatch here is common because of timing differences and unrecorded items and is not itself a sign of error.
2. Identifying deposits in transit
A deposit in transit is an amount already recorded as received in the cash book, such as a cheque or transfer made near the period end, that the bank has not yet credited.
3. Recognising unpresented cheques
An unpresented cheque is one that the business has issued and recorded as paid, but the payee has not yet presented it for encashment. It remains outstanding during bank reconciliation until it is either presented and cleared, cancelled or otherwise resolved.
4. Recording bank charges and interest
Charges such as service fees or cheque bounce charges, along with interest earned on the account, usually appear on the bank statement before the business records them. These are genuine transactions and should be entered in the cash book so that the bank account reflects the correct balance.
5. Investigating errors and omissions
Some differences come from mistakes rather than timing, such as an incorrect amount in the cash book or an entry posted to the wrong ledger account. Each identified item is traced to its source and corrected where the error occurred.
6. Preparing the bank reconciliation statement
The cash book balance, once updated for charges, interest and corrections, is reconciled against the bank statement balance by accounting for deposits in transit and unpresented cheques. The result is presented as a BRS, showing how the adjusted balance as per the books is reconciled to the balance as per the bank statement.
Example
On 31 March, Ridhima Textiles has a cash book balance of ₹1,80,000, while the bank statement shows ₹1,96,500. The difference is due to the following items:
- A cheque of ₹40,000 issued to a supplier has not yet been presented to the bank.
- A cheque of ₹25,000 deposited by the business has not yet been credited by the bank.
- Bank charges of ₹1,500 have been deducted by the bank but are not yet recorded in the cash book.
- An interest of ₹3,000 has been credited by the bank but is not yet recorded in the cash book.
The cash book is updated to record the bank charges and interest:
₹1,80,000 − ₹1,500 + ₹3,000 = ₹1,81,500
The BRS is then prepared:
|
Particulars |
Amount (₹) |
|
Adjusted balance as per cash book |
1,81,500 |
|
Add: Unpresented cheque |
40,000 |
|
Less: Deposit in transit |
(25,000) |
|
Balance as per bank statement |
1,96,500 |
After accounting for these items, the cash book and bank statement balances match.
Key points to remember
- Bank reconciliation compares the cash book with the bank statement to identify and explain differences.
- Most differences arise from timing differences, unrecorded bank transactions or recording errors.
- Bank charges, interest and other bank entries should be identified and recorded in the cash book during or before bank reconciliation.
- Regular bank reconciliation improves the accuracy of financial records and helps maintain audit readiness.
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Try TallyPrime free →FAQs
In practice, yes. Each bank account has its own cash book and bank statement, so reconciliation is performed separately for each account.
A dishonoured cheque is a cheque that the bank rejects or returns unpaid. It creates a difference between the cash book and the bank statement until the records are corrected.
Bank reconciliation is prepared by an accountant, bookkeeper or finance team member responsible for maintaining the business's accounting records.
An unexplained gap means something has not been traced yet, such as a missed entry or an unresolved bank error. It needs further investigation rather than being written off.
Most businesses reconcile their bank accounts monthly. Businesses with a high number of transactions may perform it weekly or even daily to keep their records accurate.
