Bank Reconciliation Statement: Meaning, Uses & Format

You close your cash books for the month, relieved that the numbers look correct. But when the bank statement arrives, things do not add up. Sounds familiar?

This mismatch, which is pretty common, shows up because your books and your bank did not record the transactions at the same time, or in the same way. That’s the reason businesses need to prepare a bank reconciliation statement (BRS).

This guide explains the correct bank reconciliation statement format and how to deal with challenges when you deal with cross-border payments.

What is a Bank Reconciliation Statement?

A bank reconciliation statement is a document through which you can identify the differences between the balance recorded in your cash book or accounting records and the balance that your bank passbook shows on a given date. It happens because the transactions do not appear at the same time in both records.

For instance, you issue a cheque today and get it recorded in your books. The bank is likely to update the balance only when the cheque is cleared. Both the balances will differ until that happens. In a bank reconciliation statement, all these differences are listed. This helps you understand how the bank statement arrives at the final balance.

Businesses must understand that this reconciliation statement is not a formal financial statement. Instead, it’s an internal control tool that is usually prepared monthly or at the end of the period. However, you may also get it done daily or weekly if you run a high-volume business.

Why is a Bank Reconciliation Statement Prepared?

As a business, you may assume that your bank balance always remains accurate. However, many organizations end up making risky decisions as they continue to rely on a single source.

The main reasons why a bank reconciliation statement is prepared have been presented below:

Identifying Errors in Records

There’s always a chance for errors to creep into your cash books as a result of incorrect entries. Even processing issues can result in incorrect entries in bank statements.

To Detect Missing Transactions

At times, there are certain transactions that are showing up in your bank statements, but they do not appear in your books. These usually include bank charges, interest credits, and customer deposits.

Prevents Fraud

You may also notice unexpected entries in your bank statements. These include unauthorized withdrawals and duplicate payments. A bank reconciliation statement helps to identify these issues.

To Maintain an Accurate Flow of Cash

Often, your cash books may show more money than you actually have. In these situations, you may be approving payments that cannot be cleared or delaying payments to your vendors unnecessarily. With accurate reconciliation, you would be making your decisions based on the availability of real cash.

Tracking Pending Transactions

It takes time to track some transactions. These include cheques issued but not yet presented, and deposits made close to the month-end. Through reconciliation, you can track these pending items.

Audit and Compliance

Auditors largely rely on bank reconciliation statements to verify whether your financial records are accurate. They also get a clear picture of the completeness of your transactions. A comprehensive reconciliation statement serves as an audit trail.

Differences in International Payment

In case you’re dealing with global clients, mismatches in bank statements can be more complex. For instance, a company invoices $4,000 at ₹83 per dollar. In this case, the expected amount would be ₹3,32,000.

However, the bank credits the funds, considering the dollar value to be ₹82. It also deducts ₹3,000 as fees. The actual amount received would be ₹3,25,000, creating a difference of ₹7,000. Unless you have a well-prepared bank reconciliation statement, this difference would be unclear.

Now, check out the process of preparing a bank reconciliation statement.

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How to Prepare a Bank Reconciliation Statement?

Businesses must have a clear idea of the bank reconciliation statement rules to prepare these statements.

1. Gather All Relevant Records

First, collect your cash book or general ledger that contains relevant records. Also, get the bank statement for the same period. In case there’s a difference in time periods, you can identify the false mismatches.

2. Match Transactions Line by Line

Now, you need to compare each entry in your books with that in your bank statement. Look at the amount in the transactions, date, and the reference number. Mark the entries that appear in both the records, as they are already reconciled.

3. Identify Unmatched Transactions

Next, shortlist the entries that appear only in one record. Usually, they come under two categories. 

These include cheques that have been issued but still have not been cleared, and deposits that have not yet been credited.

These numbers usually include charges deducted by the bank, interest credited, and direct transfers.

4. Categorize the Differences

Now that you know the mismatches, group them into differences in timing, missing entries, and errors. This would make your next step easier. 

5. Adjust the Balances

Start with the balance based on your cash book. Then, add the transactions that have been recorded by the bank but not by you. Deduct the transactions that you recorded, but the bank has yet to process. The figure you adjusted must match the bank balance.

Now, check whether the final balances match and whether the documents support all the entries. As per your financial records, save the statement. Some of the common categories of mismatch include:

Note: A few extra steps are required for foreign transactions.

What is the Format of a Bank Reconciliation Statement?

A reconciliation statement starts with one balance and uses reconciling items to adjust it until it matches the other balance. Here’s the standard bank reconciliation statement format:

Businesses must understand how these adjustments work in real scenarios before they apply the process. The examples below demonstrate how mismatches usually appear and how reconciliation helps to resolve them.

Reconciling local transactions is manageable. However, when international payments involve exchange rate changes, hidden deductions, and delayed confirmations, the process becomes challenging to manage. Particularly, if there are multiple such transactions that involve different currencies in a single day, the process gets complicated over time.

If you’re tired of chasing SWIFT copies and manually calculating forex differences, check out how Skydo gives you clear transaction records and payment visibility in real time.

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What Are the Challenges in Preparing Bank Reconciliation Statements?

Although the process is methodical, it’s hard to find real-world reconciliations. Businesses usually encounter the following challenges while preparing their bank reconciliation statements.

High Volume of Transactions

As the volume of transactions increases, manual reconciliation becomes time-consuming. Errors start showing up too often. For instance, it might take several hours to match 300 transactions manually.

Differences in Timing

It might take some time for transactions recorded at the end of a period to reflect. For instance, payments that you received at the end of the month or deposits credited after a delay may create temporary mismatches.

Bank Charges and Hidden Fees

Sometimes, banks deduct maintenance fees and transfer charges. These are often not recorded in your books. You realize them only during reconciliation.

Variations in Exchange Rates

In cross-border payments, there might be a difference between the invoice rate and the credit rate. Mismatches can be seen even in correct payments.

Intermediary Bank Deductions

Often, multiple banks are involved in international transfers. Each bank may deduct a fee, which lowers the credited amount. Also, businesses experience a lack of clarity on deductions.

Delays in SWIFT Transfer 

Due to delays in SWIFT transfers, global transactions may take 2-5 working days. This also leads to mismatches in different accounting periods.

Limited Transparency

Your bank may not provide a detailed breakdown of the cross-border transfer fee and real-time updates. This makes it difficult to prepare reconciliations.

How Does Skydo Help?

When international payments are involved, there’s no denying that handling reconciliation manually becomes a challenge. Skydo comes to your rescue, improving visibility and reducing unnecessary variables. Here are the key benefits businesses derive from Skydo:

Simplify your international payment reconciliation with Skydo today.