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Bank Reconciliation

Quarter 1 (Q1) Why is It Important to Reconcile Your Bank Statements:

Bank reconciliation is a critical financial process used to match the cash balances on a company’s books to the amounts shown on its bank statement. Essential for maintaining accuracy in financial records, reconciliation in accounting involves identifying and explaining any discrepancies between these two records. By performing regular reconciliations, businesses ensure that their reported cash balances are accurate and reflect actual amounts. This process not only helps in detecting errors or inconsistencies but also aids in identifying fraudulent transactions. In this guide, we’ll explore the components of bank reconciliation, detailing which items are added or subtracted during the reconciliation of the company’s books and bank records. Join us as we delve deeper into the principles of reconciliations and their importance in business accounting

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How to prepare a bank reconciliation? The point of preparing a bank reconciliation is to reconcile the cash per bank statement to the cash balance per books (i.e. accounting records). There are a number of reconciling items, and its important that the accounting team always understands how to reconcile cash.

Cash balance per bank: When you received the bank statement from the bank, there is an ending bank balance, and that becomes your starting point. You then need to add deposits in transit and then subtract any outstanding checks.

Cash balance per books: The cash balance per books will likely not include items that the bank has responsibility for, such as interest income, cash collections directly by bank (i.e. lockbox), nonsufficient funds, and any monthly service charges.

In order for a bank reconciliation to be complete, the adjusted cash balance must equal the adjusted book balance.

How To Do A Bank Reconciliation:

Addressing Deposits in Transit in Bank Reconciliations

Deposits in transit play a pivotal role in both cash reconciliation and accounting reconciliation. These are funds that have been sent to the bank but are not yet reflected in the bank’s records, often due to timing differences such as deposits made after the bank’s cutoff time. In a bank reconciliation, deposits in transit are added to the bank statement balance to ensure accuracy. This adjustment is crucial because it accounts for the money that is physically in transit, thus not yet acknowledged by the bank. As a result, the balance as per the depositor’s records will often appear higher than what the bank statement shows until these deposits are processed. Understanding and correctly handling deposits in transit ensures that financial records remain accurate and reflective of all available funds, providing clarity and precision in financial reporting.

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Understanding Outstanding Checks in Bank Reconciliations

An outstanding check refers to a check that has been issued by a depositor but has not yet been presented to or cleared by the bank. This situation typically results in a discrepancy where the balance according to the bank’s records is higher than what appears in the depositor’s records. In the process of bank reconciliation, these outstanding checks are crucial entries: they are deducted from the bank statement’s balance. Recognizing and accounting for outstanding checks is essential to ensure that the reported balances in financial statements accurately reflect all transactions, thus avoiding potential financial misstatements. Handling these checks correctly helps maintain the integrity and accuracy of a company’s financial reporting.

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Adjustments for Various Transactions in Bank Reconciliations

Bank reconciliations involve several types of adjustments to ensure that the books accurately reflect all banking transactions. Here’s how different transactions affect the depositor’s records:

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Interest Income

  1. When interest income has been earned but not yet recorded, it should be added to the books. This adjustment is necessary because the balance per books will be understated until this revenue is recognized.

Bank Collections

Occasionally, banks may collect payments on behalf of the depositor. These collections increase the bank balance directly. If the depositor is unaware of these credits, their own records will understate the actual balance. Once aware, the depositor must add this amount to their books to align with the bank’s records.

Service Charges

Banks often deduct service charges directly from the account. However, depositors might not account for these deductions until they receive their bank statement. To rectify this, service charges should be deducted from the books to avoid overstating the balance.

NSF Checks

Non-Sufficient Funds (NSF) checks from customers represent amounts that the bank has removed from the depositor’s account due to check dishonor. NSF checks from customers should be a deduction on a bank reconciliation. If not promptly adjusted, the depositor’s book balance as of the balance sheet date will be overstated. This deduction ensures that the books accurately reflect all available funds and liabilities as of any given date.

By carefully adjusting for interest income, bank collections, service charges, and NSF checks, businesses can maintain accurate and reliable financial records. Each of these adjustments plays a crucial role in aligning the depositor’s books with the actual bank balances, ensuring financial statements are precise and trustworthy.

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Bank Reconciliation Errors

Errors (will not require changes to be made to either the books or the bank) – errors made by either the bank or the depositors are another cause for difference.

Errors within a bank reconciliation will require adjustments to either the books or the bank statement. 

Bank Reconciliation Journal Entries:

A bank reconciliation journal entry is made to adjust the balances in the company’s accounting records to reflect any discrepancies identified during the bank reconciliation process. These entries may include adjustments for bank fees, interest income, NSF checks, or errors in recording transactions.

Example: Suppose during a bank reconciliation, it is discovered that bank service charges of $50 were not recorded in the company’s books. To correct this, the following journal entry would be made:

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This journal entry increases the expenses for bank charges and decreases the cash balance, aligning the company’s books with the bank statement.

Finding the Actual Balance

Reconciling the books and the bank balances will enable you to find the actual balance that should be what is reported as cash and cash equivalents on the balance sheet. Some events will consist of adjusting the book balance to demonstrate corrections that were reported in the bank statements. This adjusted book balance will equate to the actual balance.

Presentation of Negative Cash Balances

There is a small chance the exam may ask you how to present negative cash balances on the balance sheet. Assuming that the entire bank account is negative, then the company should present the negative cash balance as a current liability on the balance sheet.

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Finding the Actual Balance​

To perform a bank reconciliation, start by comparing your company’s internal financial records against your bank statement to identify discrepancies between the two. Adjust for any differences due to outstanding checks, deposits in transit, bank fees, or errors found in either record. Once all discrepancies are accounted for and adjustments made, ensure the adjusted bank balance matches your company’s adjusted book balance, confirming accuracy in your financial records.


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