Reconciliation Statement

Reconciliation Statement Meaning

Reconciliation statement is a statement containing a list of differences between bank balance as per bank statement vis-à-vis books of accounts, debtor-creditor reconciliation, debt balance reconciliation or such any other reconciliation where there is a difference in the records of two separate legal entities, and it aims at nullifying the difference in the same accounting period or in next accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more in order to have parity in books of accounts of both legal entities.

Top 3 Types of Reconciliation Statement

Reconciliation Statement types

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#1 – Bank Reconciliation Statement

Bank reconciliation statement is often called as BRS. It is required to reconcile the difference between bank balances as per bank statement with a bank balance as per books of accounts. In companies, accounting is on a real-time basis, and sometimes cheque clearing will take time; hence in such cases, there is a mismatch in records of two different entities.

Examples of Reconciliation are as follows.
  1. Cheque deposited but not cleared.
  2. Bank charges directly debited by the bank.
  3. Cheque issued but not cleared.
  4. The customer directly deposited money into a bank account.
  5. Cheque dishonored but not recorded in books of accounts.

There is no specific format for the bank reconciliation statement. Let us take an example to understand this better.

Bank statement with a bank of America of Disney limited shows a balance of $2000 as on 30th September 2019, whereas bank balance as per records of Disney limited was $ 4100 on the same date. On detailed scrutiny of two records, the accounting manager found the following transactions are missing in either of the books of accounts.

Cheque deposited in the bank on 29th September not reflected in the bank statement yet amounting to $2500. Cheque issued to the vendor on 26th September amounting to $700 not presented hence not reflected in the statement. On 30th September, bank debited bank charges to the tune of $300 on account of annual maintenance charges plus cheque dishonor charges.

Now let us start with the bank balance as per bank statement. Bank of America (BOA) Balance is $2000, and ledger balance (LB) is $4100.

Cheque deposited but not cleared $2500.

Check-not-Cleared

Explanation: We have to match BOA and LB. At present, LB is higher than BOA balance, so in order to reach LB from BOA balance, we have to add $2500 to $2000, which makes a total of $4500. The starting point, in this case, in the balance as per BOA. The upward arrow in the above diagram indicates the amount to be added to reach the desired result. Hence $2500 will be added to BOA balance in the reconciliation statement.

Cheque issued but not presented $700.

Check-not-Presented

Explanation: Cheque issued but not presented will reduce bank balance in the near future. At present, ledger balanceLedger BalanceA ledger balance is an opening balance that remains available during the start of each business day. It comprises of all the deposits and withdrawals, used in the calculation of the total funds left in an account at the end of the previous day.read more is lower than bank balance; hence it should be deducted from the bank balance.  Downward arrow in the above diagram indicates that BOA balance has to reach LB.

Bank charges directly debited by banks.

Direct-Bank-Charge

Bank charges debited by the bank will reduce bank balance as per books of accounts and starting point balances as per bank statement; hence this should be added to.

The above diagrammatic representation is the easiest way to understand what to be added and deducted. Our aim is to match both balances. First, determine your starting point. Based on the transaction, determine which balance will go up and down and make downward arrows upward, respectively. Now, as per the above, if the starting point is bank balance, then the arrow should reach ledger balance.

Let’s see the above example of the reconciliation statement in a tabular format.

Bank Reconciliation Statement

(As of 30th September 2019)

ParticularsAmount in ($)Amount in ($)
ParticularsAmount in ($)Amount in ($)
Balance as per Bank Statement $2,500
Add: Cheque deposited$2,000 
          Bank charges debited$300 
Less: Cheque issued not cleared$700 
  $1,600
Balance as per books of accounts $4,100

#2 – Debtor-Creditor Reconciliation

Debtor creditor reconciliation is required when there is a mismatch between the balance of creditor in debtor’s books and the balance of debtor in creditor’s books.

Reasons for differences can be as follows:

  • The amount directly deposited by the debtor not recorded by the creditor;
  • Debit note and credit notes not recorded by either party
  • Goods sold but not yet reached hence not recorded.

These are reconciliation items that will lead to mismatch. The same method, as explained above, can be used to prepare a reconciliation statement. Balance reconciliation is required because it gives assurance that all purchases and sales transactions are recorded properly. Balance confirmation is sought from the top 10 parties as it is audit documentation.

#3 – Debt Balance Reconciliation

Debt balance reconciliation is the same as the bank reconciliation statement- Debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more as per bank statement vis-à-vis books of accounts.

Reasons for differences can be –

Conclusion

Reconciliation statements only provide arithmetical accuracy. It is not helpful to ensure the amount is posted to the correct account. In other words, there is a chance that compensating errors will occur even though both the balances are matching.  An example of compensating error can be the amount received from Mr. Smith is credited to the account of Mr. James. Despite this, it is of utmost required as it helps us to keep track of un-presented cheques, unknown debits to a bank account, direct creditDirect CreditDirect credit is the process of electronically transferring the funds from the payer's account to the beneficiary's account with the help of the Automated Clearing House (ACH) system. It facilitates the organizations to make periodic payments such as salary and rent through National Electronic Funds Transfer (NEFT).read more by customers.

It keeps accounts up to date and helps in simplifying accounting errorsAccounting ErrorsAccounting errors refer to the typical mistakes made unintentionally while recording and posting accounting entries. These mistakes should not be considered fraudulent behaviour first-hand as this can happen with anyone and by anyone.read more, theft. Bank reconciliation statement should be prepared by an independent person, so it helps in getting a more correct and clearer picture of books of accounts. In Corporate entities, at the end of every month, the bank reconciliation statement is made and reviewed by two independent persons.

This has been a guide to Reconciliation Statement and its meaning. Here we discuss the top 3 types of reconciliation statements, including Bank Reconciliation, Debtor-Creditor Reconciliation, and Debt balance reconciliation. You can learn more from the following articles –

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