Reconciliation Statement Meaning Top 3 Types Examples

Reconciliation Statement Meaning

A reconciliation statement contains a list of differences between bank balance as per bank statement vis-à-vis books of accounts, debtor-creditor reconciliation, debt balance reconciliation, or any other reconciliation where there is a difference in the records of two separate legal entities. It aims to nullify the difference in the same or 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 to have parity in the books of accounts of both legal entities.

Top 3 Types of Reconciliation Statement

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#1 – Bank Reconciliation Statement

Bank reconciliationBank ReconciliationCustomers perform bank reconciliation to tally their records with their respective bank’s statements because there may be differences between the customer’s books of accounts and those of the bank.read more statement is often called a BRS. It is required to reconcile the difference between bank balances per bank statement and a bank balance per book 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.

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.

A bank statement with a bank of America of Disney limited shows a balance of $2000 as of 30th September 2019, whereas the 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. The cheque was issued to the vendor on 26th September, amounting to $700, not presented and hence not reflected in the statement. On 30th September, the bank debited bank charges to $300 on account of annual maintenance charges plus cheque dishonor charges.

Now let us start with the bank balance as per the bank statement. Bank of America’s (BOA) Balance is $2000, and its 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 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, is 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 the BOA balance in the reconciliation statement.

Cheque issued but not presented $700.

Explanation: Cheque issued but not presented will reduce bank balance shortly. Currently the, 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 the bank balance; hence, it should be deducted from the bank balance. The downward arrow in the above diagram indicates that the BOA balance has to reach LB.

Banks directly debit bank charges.

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.

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

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

Bank Reconciliation Statement

(As of 30th September 2019)

#2 – Debtor-Creditor Reconciliation

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

Reasons for differences can be as follows:

The amount directly deposited by the debtorDebtorA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion.
read more not recorded by the creditor;Debit note and credit notes not recorded by either partyGoods sold but not yet reached hence not recorded.

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

#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 –

Interest accruedInterest AccruedAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period.read more not recorded in books of accountsLate payment fees and charges not recorded in books of accountsThe interest amount booked differs from the actual amount the bank charges.

Conclusion

Reconciliation statements only provide arithmetical accuracy. Ensuring the amount is posted to the correct account is not helpful. 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 credited to the account of Mr. James. Despite this, it is of utmost required as it helps us keep track of unpresented 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.

An independent person should prepare a bank reconciliation statement, so it helps get a more correct and clearer picture of accounts. It keeps accounts up to date and helps simplify accounting errors and theft. In Corporate entities, at the end of every month, the bank reconciliation statement is made and reviewed by two independent persons.