Bank reconciliations play an important role in your internal control procedures regarding cash. When you perform a bank reconciliation, you’re comparing your company records to your bank records to ensure they’re the same. By reconciling those dollar amounts, you can spot discrepancies due to timing issues, bookkeeping mistakes, and fraud before they become major issues.
To perform a bank reconciliation, you make manual adjustments to the dollar amounts reported on both sets of financial documents. The end goal is to have the bank balance equal to the balance in your financial records.
Balance Per Bank
The first step in a bank reconciliation is to adjust the balance reported by your bank. The amount shown on your bank statement isn’t always the same as what you have recorded due to the timing of financial transactions. For example, cheques you submitted to pay invoices or other bills may not have cleared the bank yet. Your bank account still shows you have that money even though your books show that you’ve made the payment.
Your bank account balance may show lower than your records if a deposit you made hasn’t been processed yet. To ensure it’s just a timing issue and not an error, you need to make adjustments to the bank statement balance to account for those transactions.
The easiest way to adjust your reported bank balance is to note the ending balance in a spreadsheet and manually adjust the figure. Adjusting the bank balance portion of the bank reconciliation doesn’t require you to adjust entries, you just need to make manual changes to the figure reported by the bank. Follow these steps:
- Start your adjustments with the ending balance shown on your bank statement.
- Add the balance of deposits in transit to your starting balance. These outstanding cheques are items you’ve received and accounted for but are still on the way to the bank for deposit and don’t show in your bank balance yet.
- Deduct the balance of outstanding cheques from your account that haven’t cleared yet. In your records, you’ve already recorded that you’ve made payments. Since the cheques haven’t been cashed yet, you need to subtract them from your bank balance to make that amount match your financial records.
- Check for errors on the part of your bank. If you notice incorrect deposits or typos, alert your bank to perform the proper adjustments.
Balance Per Books
Now that you’ve handled the bank balance portion, you need to adjust the numbers in your records to reflect things you haven’t accounted for yet that can make your actual bank account balance higher or lower than the numbers in your books. These items typically include fees, service charges, and interest.
To adjust the balance per books, locate your cash balance reported on the same day as the bank reconciliation. Then, account for the following items by entering the appropriate journal entries:
- Deduct bank fees or service charges. Your bank automatically charges these fees based on the terms of your banking account. You may not receive notice of these fees and charges, which means you may not account for them ahead of time in your books.
- Deduct fees relating to NSF cheques or fees associated with bounced cheques you try to cash. Since you don’t know ahead of time if a customer’s cheque is going to bounce, you usually don’t find out about these fees until you reconcile your account.
- Add a journal entry to recognize your interest revenue earned. Your bank automatically applies interest you earn to your account without notice, so you need to add it to your records.
- Adjust your records for any cheques collected by the bank. These are items related to a payment box the bank manages on your behalf.
- Check for errors in your cash account, including transposition errors.
Posting Journal Entries
All the adjustments for your books require you to make an adjusting journal entry. If your cash balance is too low, your entry requires a debit to cash. For example, when the bank posts interest revenue to your account, you don’t have any record of this in your financial statements.
You need to debit cash in that amount to increase your record, credit interest revenue to report the interest revenue, and post the entry for your records to match the activity by the bank.
Comparing the Balances
After adjusting the balance per bank and balance per books, the ending adjust amounts should be equal. If they’re not, it’s an indicator that something’s not right. Investigate whether this is a result of an error, an incorrect omission, incorrect reconciliation dates, or fraud.
Performing regular bank reconciliations helps ensure your accounts are accurate before a major mistake hurts your finances. Keep your books accurate and up to date automatically. Change the way you manage your finances now.