Reconciliation Statement Meaning
Reconciliation statement is a statement containing 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 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 period in order to have parity in books of accounts of both legal entities.
Top 3 Types of Reconciliation Statement
#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
- Cheque deposited but not cleared.
- Bank charges directly debited by the bank.
- Cheque issued but not cleared.
- The customer directly deposited money into a bank account.
- 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.
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.
Explanation: Cheque issued but not presented will reduce bank balance in the near future, at present, ledger balance 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.
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 upward downward arrows respectively. Now as per 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
#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:
- Amount directly deposited by the debtor not recorded by the creditor.
- Debit note 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 balance as per bank statement vis-à-vis books of accounts.
Reasons for differences can be –
- Interest accrued not recorded in books of accounts
- Late payment fees and charges not recorded in books of accounts
- The interest amount booked is different from the actual amount charged by the bank.
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 credit by customers.
It keeps accounts up to date and helps in simplifying accounting errors, 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 statement including Bank Reconciliation, Debtor-Creditor Reconciliation, and Debt balance reconciliation. You can learn more from the following articles –