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What adjustments are made to a bank balance when preparing a balance reconciliation?

On the bank side of the bank reconciliation, you start with the ending balance per the bank statement, you add deposits in transit and subtract outstanding checks. The adjusted represents the adjusted bank balance that is compared to the adjusted bank balance.

The visual below illustrates the full bank reconciliation process, and the adjustments to the bank are on the left side!

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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 Learn More Smarter business tools for the world’s hardest workers Learn More Learn More 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. 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. Start A Free 7-Day Trial You’ll receive access to video lectures, study guides, and practice questions. No credit card required! Start My Free Trial Learn More 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: Interest Income Bank Collections Service Charges NSF Checks Interest Income 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. 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.  Business Analysis and Reporting (BAR) Learn More 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...

  • What is a deposit in transit and why is it included in a bank reconciliation?

    A deposit in transit is when the company sends a check or cash to the bank, but as of the end of the month, the bank has not yet processed the receipt of the funds. Therefore, the company’s monthly bank statement excluded the funds, even though they have already recorded the receipt of the funds in their accounting records. The company should add deposits in transit to the balance per bank statement.

  • What is an outstanding check and why is it included in preparing a bank reconciliation?

    An outstanding check is a check that has been written by the company and send to a vendor, however, the vendor has not yet received or not yet deposited the check. Since the company mailed the check, they would have credited cash, but the bank would not process the check until the customer deposits the check. Outstanding checks should be subtracted from the balance per bank statement. Learn More