Preparing A Bank Reconciliation

3/31/22, 5:11 PM Preparing a Bank Reconciliation | Financial Accounting
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Financial Accounting
Chapter 4: Cash
Preparing a Bank Reconciliation
In accounting, cash includes coins; currency; undeposited negotiable in-

struments such as checks, bank drafts, and money orders; amounts in
https://courses.lumenlearning.com/sac-finaccounting/chapter/preparing-a-bank-reconcili… 1/14
struments 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withdrawn from a bank at will (demand CD) or at a fixed maturity date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 Only demand CDs that may be withdrawn at any time without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 transac-

tions. The company deposits its cash receipts in a bank checking ac-
count 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 be-
cause 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 (liabil-
ities 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 (de-
positor) 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 deter-
mine 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
Statement Date
1111 College Way
September 30
Virginia Beach, VA
September 1 Beginning Balance $16,850
+ Deposits and other

$22,367
Credits
– Checks and other

($11,822)
Debits
September 30 ENDING BALANCE $27,395
Deposits and Other Credits
1-Sep $1,500 25-Sep $10,000
15-Sep $2,514 29-Sep $4,500
16-Sep $350 Interest $3
20-Sep $500 CM $3,000
Total Deposits $22,367
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 $11,822
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 dur-

ing 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 ser-
vice 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 jour-
nal, cash general ledger postings or lists of cash transactions. An exam-
ple of a cash listing is:
My Company’s Records
Sept 1 Cash
$16,850
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
$26,064
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 Equipment
2006 15-Sep $333 Supplies
2007 20-Sep $480 Inventory
2008 20-Sep $650 Payroll
2009 22-Sep $200 Postage
Sales
2010 28-Sep $2,571
Commissions
2011 28-Sep $235 Utilities
2012 30-Sep $5,500 Equipment
Total
($18,457)
Checks
Sept 30 Cash
$24,457
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 rec-
onciliation 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 compar-
ing 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 recon-
ciliation. 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 de-
posits 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 suc-
ceeding 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 state-
ment. For example, a deposit made in a bank’s night depository on May
ment. 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 in-
vestigate 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 outstand-
ing 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 cur-
rent 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 ser-
vice 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.
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 be-
cause 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 re-
viewing the bank statement or canceled checks.
Deposits in transit, outstanding checks, and bank service charges usu-

ally 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 rec-
onciliation would appear as follows:
My Company
Bank Reconciliation
September 30
Ending Bank Ending Book

$27,395 $24,457
Balance Balance
Add:
Add:
9/30 6,700 3
Interest
Deposit
Note
3,000 3,003
Collected
Subtract:
O/S Ck
1,000 Subtract:
#2004
# 2008 650 Bank Fee 5
Customer
# 2009 200 350
NSF
CK 2005
# 2012 5,500 360
Error
– 7,350 – 715
Adjusted Bank $26,745 Adjusted Book

$26,745
Balance 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 sub-
tracted to the book side in the bank reconciliation, we will CREDIT cash.
The journal entries for the books side of My Company are:
Debit Credit
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(1) Cash 3
Interest Revenue 3
To record interest received from bank.
(2) Cash 3,000
Collection Fee 500
Notes Receivable 3,500
To record collection of note and fee by bank.
(3) Bank Service Fees 5
Cash 5
To record bank fees charged by bank.
(4) Accounts Receivable 350
Cash 350
To record Customer NSF from the bank.
(5) Equipment 360
Cash 360
To correct recording error on check #2005.
These entries are posted to the general ledger accounts. The cash gen-
eral ledger account would be:
Account: Cash Debit Credit Balance
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Beginning Balance 16,850
Deposits 26,064 42,914
Checks 18,457 24,457
(1) Interest earned 3 24,460
(2) Note collected 3,000 27,460
(3) Bank Service Fee 5 27,455
(4) Customer NSF 350 27,105
(5) Error Correction 360 26,745
The ending cash balance on the general ledger is reconciled to the ad-
justed bank statement balance.
When a company maintains more than one checking account, it must

reconcile each account separately with the balance on the bank state-
ment 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 impor-

tant 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 ac-
count each month. Sending the statement directly limits the number of
employees who would have an opportunity to tamper with the
statement.
For a different perspective and chance to practice simple bank reconcili-

ations, click Banking Practice.
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3/31/22, 5:11 PM Preparing a Bank Reconciliation | Financial Accounting

Interested in teaching this course?

Lumen can help! Review our up-to-date Financial Accounting by clicking

Review This Course

In accounting, cash includes coins; currency; undeposited negotiable in-

struments such as checks, bank drafts, and money orders; amounts in

Most companies use checking accounts to handle their cash transac-

A bank statement is a record of your bank account transactions, typically

September 1 Beginning Balance $16,850

+ Deposits and other

– Checks and other

September 30 ENDING BALANCE $27,395

Deposits and Other Credits

1-Sep $1,500 25-Sep $10,000

15-Sep $2,514 29-Sep $4,500

16-Sep $350 Interest $3

20-Sep $500 CM $3,000

Total Deposits $22,367

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

NSF 9/18 $350

Total Checks $11,822

CM is for collection of a note. Note was for $3500 but bank

SC is for bank service charges.

This bank statement is an example of the transactions that occurred dur-

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 Equipment

2006 15-Sep $333 Supplies

2007 20-Sep $480 Inventory

2008 20-Sep $650 Payroll

2009 22-Sep $200 Postage

2011 28-Sep $235 Utilities

2012 30-Sep $5,500 Equipment

The bank balance on September 30 is $27,395 but according to our

A bank reconciliation compares the bank statement and our company’s

Add: Deposits in Transit Add: Note Collections

Subtract: Outstanding Checks Subtract: Customer NSF

Subtract: Bank Service Fees

Add/Subtract Bank errors Add/Subtract Book errors

= Adjusted Bank Balance = Adjusted Book Balance

ment. For example, a deposit made in a bank s night depository on May

Paid checks. If canceled checks (a company’s checks processed and

for any items not already recorded in the company s books.

Bank Errors. Sometimes banks make errors by depositing or taking

Book Errors. List any Book errors. A common error by depositors is

Deposits in transit, outstanding checks, and bank service charges usu-

After comparing the bank statement and records of My Company, you