Learning Outcomes
- Prepare a bank reconciliation
Let’s examine a more complicated [and therefore more realistic] example of reconciling the GL to the bank.
This bank statement is an example of the transactions that occurred during the month of September for My Company:
First BankVirginia Beach, VA
| Customer: My Company | Statement Date September 30 | |
| 111 College Way | ||
| 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 | |
| 1-Sep | $1,500 | |
| 15-Sep | $2,514 | |
| 16-Sep | $350 | |
| 20-Sep | $500 | |
| 25-Sep | $10,000 | |
| 29-Sep | $4,500 | |
| Interest | $3 | |
| CM | $3,000 | |
| $22,367 | ||
| 2001 | 1-Sep | $750 |
| 2002 | 5-Sep | $980 |
| 2002 | 5-Sep | $275 |
| 2005 | 10-Sep | $5,843 |
| 2006 | 15-Sep | $333 |
| 2007 | 21-Sep | $480 |
| 2010 | 28-Sep | $2,571 |
| 2011 | 28-Sep | $235 |
| SC | 30-Sep | $5 |
| NSF | 18-Sep | $350 |
| $11,822 | ||
| Notes | ||
| CM is for collection of a note. Note was for $3,500 but the 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 |
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].
Here is the company’s GL:
General Ledger
Account: CheckingAccount No. 1100
| Bal fwd | 16,850.00 | ||||||
| 1 | 1,500.00 | 18,350.00 | |||||
| 1 | 750.00 | 17,600.00 | |||||
| 5 | 980.00 | 16,620.00 | |||||
| 5 | 275.00 | 16,345.00 | |||||
| 8 | 1,000.00 | 15,345.00 | |||||
| 10 | 5,483.00 | 9,862.00 | |||||
| 14 | 2,514.00 | 12,376.00 | |||||
| 15 | 350.00 | 12,726.00 | |||||
| 15 | 333.00 | 12,393.00 | |||||
| 20 | 500.00 | 12,893.00 | |||||
| 20 | 480.00 | 12,413.00 | |||||
| 20 | 650.00 | 11,763.00 | |||||
| 22 | 200.00 | 11,563.00 | |||||
| 24 | 10,000.00 | 21,563.00 | |||||
| 28 | 2,571.00 | 18,992.00 | |||||
| 28 | 235.00 | 18,757.00 | |||||
| 28 | 4,500.00 | 23,257.00 | |||||
| 30 | 6,700.00 | 29,957.00 | |||||
| 30 | 5,500.00 | 24,457.00 |
The bank balance on September 30 is $27,395, but according to My Company records, the ending cash balance is $24,457. We need to do a bank reconciliation [and some research] to explain the difference.
Stop here for a moment to cross off any items that appear on both the bank statement and the GL because they don’t have to be reconciled. Ignore any slight timing differences because, for instance, the check the company wrote on September 20 for $480 didn’t clear the bank until the next day, but that’s not a problem because it’s on the bank statement and in the GL.
After comparing the bank statement and records of My Company, you should have identified the following reconciling items:
- Deposit in transit dated 9/30 for $6,700.
- Outstanding checks #2004, 2008, 2009, 2012.
- Interest paid by the bank $3.
- Note collected by bank $3500 less $500 fee.
- Bank service charge $5.
- Customer NSF $350.
- Error in Check #2005 correctly processed by the bank as $5,843 but recorded in our records as $5,483.
The following table will give you some examples of how reconciling items apply in a bank reconciliation:
Bank Reconciliation
| Deposits in Transit | Note Collections and Interest |
| Outstanding Checks | Customer NSF and Bank Service Fees |
| Bank errors | 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 on 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 from 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 items such as service charges, non-sufficient funds [NSF] checks, safe-deposit box rent, and notes paid by the bank for the depositor. Credit memos reflect additions for items such 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 an account in error. You will need to contact the bank to correct these errors, but will not record any errors in your records because the bank error is unrelated to your records.
Book Errors
Preparing a Bank Reconciliation
The first step in preparing the bank reconciliation is to adjust the bank balance for any timing differences and/or the rare bank error. Add deposits in transit and subtract outstanding checks so the bank balance is adjusted to reflect transactions My Company made in September that the bank didn’t record until October because of lag time:
| Ending Bank Balance | $27,395.00 | |
| Add: 9/30 Deposit | $6,700.00 | |
| Single Line | $34,095.00 | |
| Subcategory, Subtract: | ||
| O/S Ck #2004 | $1,000.00 | |
| # 2008 | $650.00 | |
| # 2009 | $200.00 | |
| # 2012 | $5,500.00 | |
| Single Line | $7,350.00 | |
| Adjusted Bank Balance | Single Line$26,745.00 Double Line |
If the bank records are accurate, this should be the GL balance. However, My Company missed recording a couple of items and made a mistake. If we take those errors into account, the GL would look like this:
| Ending Book Balance | $24,457.00 | |
| Add: Interest | $3.00 | |
| Note Collected | $3,000.00 | $27,460.00 |
| Subcategory, Subtract: | ||
| Bank Fee | $5.00 | |
| Customer NSF | $350.00 | |
| CK 2005 Error | $360.00 | |
| Single Line | $715.00 | |
| Adjusted Book Balance | Single Line$26,745.00Double Line |
When the bank [top section of the reconciliation] and book [bottom section] 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 record journal entries for each of the reconciling items, because those are transactions you forgot to record in September during your regular bookkeeping process.
[Note: Sometimes the adjusted bank balance is on the left side and the adjusted book balance is on the right side.]