Most explanations of bank reconciliation stop at the definition and leave the reader to work out what the month end actually looks like. This one runs a complete reconciliation for a small business, with real figures on both sides, and finishes with the journal entries that follow from it.
The exercise is not a matter of forcing the bank balance to agree with the ledger balance as the two balances stand. Both balances are adjusted for items the other side has not yet recorded, and both adjusted balances then arrive at the same true cash figure.
Key Takeaways
- A bank reconciliation adjusts two records of the same cash toward a third figure that both records should reach, rather than forcing one record to match the other.
- The bank side is adjusted for deposits in transit and for outstanding checks, and neither adjustment produces a journal entry.
- The book side is adjusted for bank fees, for interest earned, for returned customer checks and for recording errors, and every book side adjustment produces a journal entry.
- A difference that remains after both sides have been adjusted is itself diagnostic, and a difference divisible by nine almost always indicates transposed digits.
- A reconciliation performed monthly is the minimum standard, and a connected bank feed reduces the work to reviewing the exceptions.
Why the two balances differ
A transaction is recorded in the ledger on the date the transaction occurs, and the same transaction is recorded by the bank on the date the money moves. Those two dates are rarely the same date, and the period between the two dates is where every reconciling item is created.
Reconciling items fall into four categories. Timing differences on the side of the business arise where a check has been written or a deposit has been made and the bank has not yet processed the check or the deposit. Timing differences on the side of the bank arise where the bank has charged a fee, credited interest or returned a customer check and the statement has not yet been reviewed. Recording errors arise where either party has recorded an incorrect amount. Unauthorized activity arises rarely, and the possibility of unauthorized activity is the reason the reconciliation is performed at all.
The opening figures
Meadow Lane Design closes the month of October with the two balances set out below.
| Source | Balance at October 31 |
|---|---|
| Bank statement ending balance | $14,820.55 |
| Cash account in the general ledger | $15,413.30 |
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The difference between the two balances is $592.75. That difference carries no meaning on its own, and the reconciliation is the process by which the difference is explained in full.
Adjusting the bank side
Bank side adjustments consist of items that have already been recorded in the ledger and have not yet been recorded by the bank. Deposits that the bank has not yet credited are added to the bank statement balance, and checks that the bank has not yet cleared are subtracted from the bank statement balance.
Deposits in transit
A customer deposit of $2,400.00 was placed in the night drop on October 30 and was posted by the bank on November 2. The deposit belongs to October in the records of the business and belongs to November in the records of the bank, so the deposit is added back to the bank statement balance.
Outstanding checks
Three checks were written during October and had not cleared the bank as at October 31.
| Check | Payee | Amount |
|---|---|---|
| 1042 | Coastal Print Co. | $780.25 |
| 1047 | Renwick Property Group | $1,310.00 |
| 1051 | Alvarez Electrical | $145.00 |
| Total outstanding | $2,235.25 |
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The adjusted bank balance
| Line | Amount |
|---|---|
| Bank statement ending balance | $14,820.55 |
| Add: deposit in transit | $2,400.00 |
| Less: outstanding checks | ($2,235.25) |
| Adjusted bank balance | $14,985.30 |
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Adjusting the book side
Book side adjustments consist of items that have already been recorded by the bank and have not yet been recorded in the ledger. Every book side adjustment listed below is subsequently recorded as a journal entry.
Interest of $12.00 was credited to the account during the month. A service charge of $35.00 was charged to the account during the month. A customer payment of $450.00 was returned unpaid and the bank recovered the $450.00 from the account. A recording error was made on check 1039, which was written for $427.00 and was entered in the ledger as $472.00, so that the expense was overstated by $45.00 and the cash balance in the ledger was understated by $45.00.
| Line | Amount |
|---|---|
| Ledger cash balance | $15,413.30 |
| Add: interest earned | $12.00 |
| Less: service charge | ($35.00) |
| Less: returned customer check | ($450.00) |
| Add: correction of check 1039 | $45.00 |
| Adjusted book balance | $14,985.30 |
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The adjusted bank balance and the adjusted book balance both arrive at $14,985.30, and the reconciliation is therefore complete. The figure reported as cash on the balance sheet is $14,985.30, and the figure reported as cash is neither of the two balances with which the reconciliation began.
The journal entries
Only the book side adjustments are recorded as journal entries. The deposit in transit and the outstanding checks were recorded in the ledger at the time each transaction occurred, and no further entry is required for either the deposit in transit or the outstanding checks.
| Entry | Debit | Credit |
|---|---|---|
| Cash Interest income | $12.00 | $12.00 |
| Bank service charges Cash | $35.00 | $35.00 |
| Accounts receivable Cash | $450.00 | $450.00 |
| Cash Printing expense | $45.00 | $45.00 |
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The entry for the returned customer check is the entry most often recorded incorrectly. The customer continues to owe the amount that was returned, so the amount of the returned check is restored to accounts receivable rather than being written off. Writing the amount off as a bad debt at the point of return is premature, and writing the amount off as a bad debt also conceals the fact that an invoice remains unpaid.
When the two adjusted balances still disagree
Four checks are worth working through in order before the reconciliation is restarted from the beginning.
A difference divisible by nine almost always indicates transposed digits, because a difference of $45, $90, $270 or $810 is produced by reversing two digits within a single figure. An amount of $472.00 entered in place of an amount of $427.00 produces a difference of exactly $45.00.
A difference equal to exactly twice the amount of a listed transaction indicates that the transaction was added where the transaction should have been subtracted.
A difference equal to the exact amount of a single transaction indicates that the transaction was recorded once where the transaction should have been recorded twice, or recorded twice where the transaction should have been recorded once.
A difference that resists all three of the above checks may have been carried forward from a prior month, because an unresolved difference is carried forward silently. The prior month should be confirmed as reconciled before further time is spent on the current month.
Checks that never clear
An outstanding check that remains outstanding after six months is no longer a timing difference. Most states treat uncashed checks as unclaimed property after a defined period, and the obligation to the payee does not lapse because the payee has lost the check. The payee should be contacted, the check should be voided and reissued where appropriate, and the liability should remain recorded in the ledger until the liability is settled.
How often the reconciliation should be performed
A reconciliation performed once each month is the minimum standard. A business with a high volume of transactions, or a business in which several people hold payment authority, is better served by a weekly reconciliation, because part of the value of a reconciliation lies in identifying problems while the problems remain small and remain traceable.
The volume of manual work falls considerably where the bank feed performs the matching. Where a live bank connection is in place, cleared transactions are matched automatically and the items remaining on screen are the exceptions, which are the items that required attention in the first place.
Reconciling a month should take minutes, not an afternoon of scrolling a statement. GlassJar matches the cleared items for you and puts the exceptions in one list, so the only thing left to look at is the handful of transactions that genuinely need a decision. See how it works.
Frequently asked questions
What is a bank reconciliation?
A bank reconciliation is a periodic comparison of the cash balance recorded in the ledger against the balance reported on the bank statement, in which both balances are adjusted for items the other record has not yet captured so that both adjusted balances arrive at the same cash figure.
Which side of a bank reconciliation produces journal entries?
Only the book side produces journal entries. Bank fees, interest earned, returned customer checks and recording errors all require entries. Deposits in transit and outstanding checks require no entry, because both were recorded in the ledger when each transaction occurred.
How is a returned customer check recorded?
A returned customer check is recorded as a debit to accounts receivable and a credit to cash for the amount that the bank recovered. The customer continues to owe the amount, so the amount is restored to accounts receivable rather than written off as a bad debt.
What are the steps in a bank reconciliation?
The bank statement balance is adjusted for deposits in transit and for outstanding checks. The ledger cash balance is adjusted for fees, interest, returned items and recording errors. Both adjusted balances are confirmed to agree, and journal entries are then recorded for the book side adjustments only.
What does a difference divisible by nine indicate?
A difference divisible by nine is the characteristic signature of transposed digits, such as an amount of $472.00 recorded in place of an amount of $427.00. Each recorded amount should be compared against the statement digit by digit rather than the arithmetic being recalculated.
