Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

Step 2. Adjusting the Balance per Books
Step 3. Comparing the Adjusted Balances
Step 4. Preparing Journal Entries

What is a bank reconciliation?

A bank reconciliation is a process performed by a company to ensure that the
company's records (check register, general ledger account, balance sheet, etc.) are
correct and that the bank's records are also correct.
A Bank reconciliation is a process that explains the difference between the bank
balance shown in an organization's bank statement, as supplied by the bank, and
the corresponding amount shown in the organization's own accounting records at a
particular point in time.

THE PURPOSE OF THE BANK RECONCILIATION STATEMENT

Due to the timing difference,omissions and errors made by the bank or the firm
itself,the balances of the bank statement and the bank account in the cash book
rarely agree.
Bank reconciliation statements can be used to explain the reasons for the
differences and to identify errors and omissions in both documents,so that
corrections can be made as soon as possible.

REASONS FOR DIFFERENCES BETWEEN THE CASH BOOK AND THE

BANK STATEMENT.
Uncredited items
They are deposits paid into the bank.These items occurred too close
to the cut-off date of the bank statement and so do not appear on
the statement.They will appear on the next statement.
Unpresented cheques
They are cheques issued by the firm that have not yet been
presented to its bank for payment.
Standing orders
They are standing instructions from the firm to the bank to make
regular payments.
Direct debits
They are payments made directly through the bank.

Bank charges
They are charges made by the bank to the company for banking
services used.
Dishonoured cheques
They are cheques deposited but subsequently returned by the bank
due to the failure of the drawer to pay.
Credit transfers/direct credits
They are collections from customers directly through the bank.

Prepaid Expenses
Prepaid expenses are future expenses that a business pays for in advance before it actually incurs them,
such as insurance coverage for next year or rent paid for next month. Before prepaid expenses are
consumed, businesses consider them assets that can provide future benefits. Prepaid expenses expire
either with the passage of time or through use and consumption. In other words, prepaid expenses as
assets are gradually used up as a business incurs the related expenses over time.

Prepaid Revenues

Prepaid revenues, also referred to as unearned revenues, are prepayments that a business receives from
its customers for future delivery of goods or services. Following the revenue recognition principle,
businesses cannot record customer prepayments as recognized revenues until sales to customers are
completed. Examples of prepaid revenues include airline ticket sales before flight services or school
tuition received during registration. Holding customer payments, a business is liable for the future transfer
of goods or serves. Thus, prepaid revenues are liabilities for businesses, and become earned revenues
over time as they complete the intended sales.

Prepaid income is revenue received in advance but which is not yet

earned. Income must be recorded in the accounting period in which it
is earned.