Bank Reconciliation

Bank Reconciliation Definition

A bank reconciliation is the process of matching the
balances in an entity's accounting records for a cash
account to the corresponding information on a bank
statement. The goal of this process is to ascertain the
differences between the two, and to book changes to
the accounting records as appropriate.
BREAKING DOWN 'Bank Reconciliation Statement'

Bank reconciliation statements ensure payments

have been processed and cash collections have been
deposited into the bank. The reconciliation statement
helps identify differences between the bank balance
and book balance, in order to process necessary
adjustments or corrections. An accountant typically
processes reconciliation statements once a month.
 Required Information to Create Bank
Reconciliation Statement
Completing a bank reconciliation statement requires using
both the current and the previous month's statements,
including the closing balance of the account. The accountant
typically prepares the bank reconciliation statement using all
transactions through the previous day, as transactions may
still be occurring on the actual statement date. All deposits
and withdrawals that have been posted to the account must
be on hand to prepare the reconciliation statement.
 Bank Reconciliation Terminology
 Deposit in transit. are amounts already received and recorded by
the company, but are not yet recorded by the bank. For example, a retail
store deposits its cash receipts of August 31 into the bank's night depository
at 10:00 p.m. on August 31. The bank will process this deposit on the
morning of September 1. As of August 31 (the bank statement date) this is a
deposit in transit..
Outstanding check. A are checks that have been written and recorded in
the company's Cash account, but have not yet cleared the bank account.
Checks written during the last few days of the month plus a few older checks
are likely to be among the outstanding checks.
 Bank Reconciliation Terminology
NSF check. A check that was not honored by the bank of the entity issuing the
check, on the grounds that the entity's bank account does not contain sufficient
funds. NSF is an acronym for "not sufficient funds." The entity attempting to
cash an NSF check may be charged a processing fee by its bank. The entity
issuing an NSF check will certainly be charged a fee by its bank.
Bank errors are mistakes made by the bank. Bank errors could include the bank
recording an incorrect amount, entering an amount that does not belong on a
company's bank statement, or omitting an amount from a company's bank
statement. The company should notify the bank of its errors. Depending on the
error, the correction could increase or decrease the balance shown on the bank
statement. (Since the company did not make the error, the company's records
are not changed.)
 Bank Reconciliation Process
Step 1. Adjusting the Balance per Bank
The first step is to adjust the balance on the bank statement to the true, adjusted, or corrected
balance. The items necessary for this step are listed in the following schedule:
 Bank Reconciliation Process
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash
account so that it is the true, adjusted, or corrected balance. Examples of the items involved are
shown in the following schedule:
 Bank Reconciliation Process
Step 3. Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after adjusting the balance per
books (Step 2), the two adjusted amounts should be equal. If they are not equal,
you must repeat the process until the balances are identical. The balances should
be the true, correct amount of cash as of the date of the bank reconciliation.
Step 4. Preparing Journal Entries
Journals Entries must be prepared for the adjustments to the balance per
books (Step 2). Adjustments to increase the cash balance will require a journal
entry that debits Cash and credits another account. Adjustments to decrease the
cash balance will require a credit to Cash and a debit to another account.
 Example - Bank Reconciliation
On Jan. 31, the company record show a cash balance of 10,900
The cash balance according to the bank statement was 15,600
Other information:
Outstanding checks NO. 40 = 3,000
NO. 41 = 1,400
NO. 42 = 1,500
Deposit in transit = 1,980 collection fees= 50
Interest Revenue =50 collection of N/R = 2,000
Bank service charge= 70 NSF check of =1,050
THE company wrote check NO. 45 for 1,200, the bank correctly paid the amount, but the company
recorded the check with balance of 1,250
 Answer

Bank Statement Book Statement

Bank Balance 15,600 Book Balance 10,900

Less: Outstanding checks (5,900) Less: NSF Checks (1,050)

(3,000+1,400+ 1,500) Less: Collection fees (50)

Add: Deposit In Transit 1,980 Less: Bank Service Charge (70)

Correct Amount 11,680 Add : collection of NR 2,000

Less: Check Error (50)

Correct Amount 11,680