Preparing a Bank Reconciliation

In accounting, cash includes coins; currency; undeposited negotiable instruments such as

checks, bank drafts, and money orders; amounts in checking and savings accounts; and
demand certificates of deposit. A certificate of deposit (CD) is an interest-bearing deposit
that can be withdrawn from a bank at will (demand CD) or at a fixed maturity date (time
CD). Only demand CDs that may be withdrawn at any time without prior notice or penalty
are included in cash. Cash does not include postage stamps, IOUs, time CDs, or notes
receivable.

Most companies use checking accounts to handle their cash transactions. The company
deposits its cash receipts in a bank checking account and writes checks to pay its bills. Keep
in mind, a bank account is an asset to the company BUT to the bank your account is a
liability because the bank owes the money in your bank account to you.  For this reason, in
your bank account, deposits are credits (remember, liabilities increase with a credit) and
checks and other reductions are debits (liabilities decrease with a debit).

The bank sends the company a statement each month. The company checks this statement
against its records to determine if it must make any corrections or adjustments in either
the company’s balance or the bank’s balance.   A bank reconciliation is a schedule the
company (depositor) prepares to reconcile, or explain, the difference between the cash
balance on the bank statement and the cash balance on the company’s books. The company
prepares a bank reconciliation to determine its actual cash balance and prepare any
entries to correct the cash balance in the ledger.

Bank Statement

A bank statement is a record of your bank account transactions, typically for one month,
prepared by the bank.  A bank statement looks like this:

 First Bank

 Virginia Beach, VA

Customer: My Company

1111 College Way  Statement Date Sep

Virginia Beach, VA

September 1 Beginning Balance  $16,850

+ Deposits and other Credits $22,367

– Checks and other Debits ($11,822)

September 30 ENDING BALANCE  $27,395

Deposits and Other Credits

1-Sep $1,500 25-Sep

15-Sep $2,514 29-Sep

16-Sep $350 Interest

20-Sep $500 CM

Total Deposits

Checks and Other Debits

2001 9/1 $750

2002 9/5 $980

2003 9/5 $275

2005 9/10 $5,843

2006 9/15 $333

2007 9/21 $480

2010 9/28 $2,571

2011 9/28 $235

SC 9/30 $5

NSF 9/18 $350

Total Checks

Notes: 

CM is for collection of a note. Note was for $3500 but bank charged a $500 collection fee.
 SC is for bank service charges.

NSF is for customer payment that could not be funded due to Non Sufficient Funds.

This bank statement is an example of the transactions that occurred during the month.  In
the Deposit and credits section, you see the deposits made into the account and a CM which
is a collection of a note (see note at bottom of statement) and interest the bank has paid to
your account.  In the Checks and debits section, you see the individual checks that have
been processed by the bank and you also see SC for a bank service charge on your account
as well as a NSF (stands for Non Sufficient Funds) and means we made a deposit from a
customer but the customer did not have enough money to pay the check (bounced check).

Company’s Records

The company’s records (or books) refers to the general ledger posting and can be in the
form of cash disbursement journal, cash receipt journal, cash general ledger postings or
lists of cash transactions.  An example of a cash listing is:

My Company’s Records

Sept 1 Cash Balance

Deposits:

1-Sep $1,500

14-Sep $2,514

15-Sep $350

20-Sep $500

24-Sep $10,000

28-Sep $4,500

30-Sep $6,700

Total Deposits

Checks:

2001 1-Sep $750 Payroll

 2002 5-Sep $980 Rent

2003 5-Sep $275 Supplies

2004 8-Sep $1,000 Inventory

2005 10-Sep $5,483 Equipmen

2006 15-Sep $333 Supplies

2007 20-Sep $480 Inventory

2008 20-Sep $650 Payroll

2009 22-Sep $200 Postage

2010 28-Sep $2,571 Sales Commis

2011 28-Sep $235 Utilities

2012 30-Sep $5,500 Equipmen

Total Checks

Sept 30 Cash Balance      

The bank balance on September 30 is $27,395 but according to our records, the ending
cash balance is $24,457.  We need to do a bank reconciliation to find out why there is a
difference.

Bank Reconciliation

A bank reconciliation compares the bank statement and our company’s records and
reconciles or balances to two account balances.  How does it do this?  There are several
items of information we can get by comparing the bank statement to our records — any
thing that doesn’t match or doesn’t exist on both places is called a reconciling item.  A
reconciling item will be added or subtracted to the bank or book side of the reconciliation. 
The following table will give you some examples of how these reconciling items apply in a
bank reconciliation:

Bank Reconciliation  

Ending Cash Balance per Bank Ending Cash Balance per Books
 Add: Deposits in Transit Add: Note Collections

Add: Interest

Subtract: Outstanding Checks Subtract: Customer NSF

Subtract: Bank Service Fees

Add/Subtract Bank errors Add/Subtract Book errors

= Adjusted Bank Balance = Adjusted Book Balance

Deposits. Compare the deposits listed on the bank statement with the deposits on the
company’s books. To make this comparison, place check marks in the bank statement and
in the company’s books by the deposits that agree. Then determine the deposits in transit.
A deposit in transit is typically a day’s cash receipts recorded in the depositor’s books in
one period but recorded as a deposit by the bank in the succeeding period. The most
common deposit in transit is the cash receipts deposited on the last business day of the
month. Normally, deposits in transit occur only near the end of the period covered by the
bank statement. For example, a deposit made in a bank’s night depository on May 31
would be recorded by the company on May 31 and by the bank on June 1. Thus, the
deposit does not appear on a bank statement for the month ended May 31. Also check the
deposits in transit listed in last month’s bank reconciliation against the bank statement.
Immediately investigate any deposit made during the month but missing from the bank
statement (unless it involves a deposit made at the end of the period).

Paid checks. If canceled checks (a company’s checks processed and paid by the bank) are
returned with the bank statement, compare them to the statement to be sure both amounts
agree. Then, sort the checks in numerical order. Next, determine which checks are
outstanding. Outstanding checks are those issued by a depositor but not paid by the bank
on which they are drawn. The party receiving the check may not have deposited it
immediately. Once deposited, checks may take several days to clear the banking system.
Determine the outstanding checks by comparing the check numbers that have cleared the
bank with the check numbers issued by the company. Use check marks in the company’s
record of checks issued to identify those checks returned by the bank. Checks issued that
have not yet been returned by the bank are the outstanding checks. If the bank does not
return checks but only lists the cleared checks on the bank statement, determine the
outstanding checks by comparing this list with the company’s record of checks issued.
Sometimes checks written long ago are still outstanding. Checks outstanding as of the
beginning of the month appear on the prior month’s bank reconciliation. Most of these
have cleared during the current month; list those that have not cleared as still outstanding
on the current month’s reconciliation.

Bank debit and credit memos. Verify all debit and credit memos on the bank statement.
Debit memos reflect deductions for such items as service charges, NSF checks, safe-deposit
box rent, and notes paid by the bank for the depositor. Credit memos reflect additions for
such items as notes collected for the depositor by the bank and wire transfers of funds from
another bank in which the company sends funds to the home office bank. Check the bank
debit and credit memos with the depositor’s books to see if they have already been
recorded. Make journal entries for any items not already recorded in the company’s books.

Bank Errors.  Sometimes banks make errors by depositing or taking money out of your
account in error.  You will need to contact the bank to correct these errors but will not
record any entries in your records because the bank error is unrelated to your records.

Book Errors. List any Book errors. A common error by depositors is recording a check in
the accounting records at an amount that differs from the actual amount. For example,
a $47 check may be recorded as $74. Although the check clears the bank at the amount
written on the check ($47), the depositor frequently does not catch the error until reviewing
the bank statement or canceled checks.

Deposits in transit, outstanding checks, and bank service charges usually account for the
difference between the company’s Cash account balance and the bank balance.

Watch the following video example and then we will continue by looking at bank statement
and records of MY COMPANY (click My Company) for a printable copy.

After comparing the bank statement and records of My Company, you should have
identified the following reconciling items:

1. Deposit in transit dated 9/30 for $6,700.

2. Outstanding checks #2004, 2008, 2009, 2012.
3. Interest paid by the bank $3.
4. Note collected by bank $3500 less $500 fee
5. Bank service charge $5
6. Customer NSF $350
7. Error in Check #2005 correctly processed by bank as $5,843 but recorded in our
records as $5,483.  This is a difference of $360 (5,843 – 5,483) and since we did not
take enough cash we need to reduce cash by $360.

Using the chart provided above and the reconciling items, the bank reconciliation would
appear as follows:

My Company      

Bank Reconciliation      

September 30      
 Ending Bank Balance $27,395 Ending Book Balance

Add: 9/30 Deposit 6,700 Add: Interest

Note Collected

Subtract:

O/S Ck #2004  1,000 Subtract:

# 2008 650 Bank Fee

# 2009  200 Customer NSF

# 2012  5,500 CK 2005 Error

– 7,350

Adjusted Bank Balance  $26,745      Adjusted Book Balance 

When the bank and book are in agreement, you are almost finished.  On the bank side of
the reconciliation, you do not need to do anything else except contact the bank if you notice
any bank errors.  On the book side, you will need to do journal entries for each of the
reconciling items.

Adjusting Entries for Book side Reconciling Items

The good news is every entry will contain CASH.  If we added to the book side in the bank
reconciliation, we will DEBIT cash.  If we subtracted to the book side in the bank
reconciliation, we will CREDIT cash.  The journal entries for the books side of My
Company are:

Debit

(1) Cash 3

       Interest Revenue

To record interest received from bank.   

(2) Cash 3,000

Collection Fee 500

        Notes Receivable

To record collection of note and fee by bank.  

(3) Bank Service Fees 5

       Cash

To record bank fees charged by bank.   

(4) Accounts Receivable 350

       Cash

To record Customer NSF from the bank.  

(5) Equipment 360

       Cash

To correct recording error on check #2005.  

These entries are posted to the general ledger accounts.  The cash general ledger account
would be:

Account: Cash Debit Credit

Beginning Balance

Deposits  26,064

Checks   18,457

(1) Interest earned 3

(2) Note collected 3,000

(3) Bank Service Fee 5

(4) Customer NSF 350

(5) Error Correction 360

The ending cash balance on the general ledger is reconciled to the adjusted bank statement
balance.
When a company maintains more than one checking account, it must reconcile each
account separately with the balance on the bank statement for that account. The depositor
should also check carefully to see that the bank did not combine the transactions of the two
accounts.

Within the internal control structure, segregation of duties is an important way to prevent
fraud. One place to segregate duties is between the cash disbursement cycle and bank
reconciliations. To prevent collusion among employees, the person who reconciles the bank
account should not be involved in the cash disbursement cycle. Also, the bank should mail
the statement directly to the person who reconciles the bank account each month. Sending
the statement directly limits the number of employees who would have an opportunity to
tamper with the statement.

LICENSES AND ATTRIBUTIONS