How to Calculate Adjusted Cash Balance
Learn to accurately calculate your adjusted cash balance. This guide explains how to reconcile your company's internal financial records with bank statements for true cash insights.
An adjusted cash balance represents the true amount of cash a business has available, aligning its internal financial records with the bank’s statements. This process ensures the accuracy of a company’s cash position. Maintaining an accurate adjusted cash balance is important for reliable financial reporting, which directly impacts sound decision-making within a business. Regular reconciliation also serves as a control measure, assisting in the early detection of discrepancies, errors, or unauthorized transactions.
Gathering Necessary Information
Before calculating the adjusted cash balance, specific documents and data points must be gathered. The bank statement for the relevant period is a primary document, summarizing all transactions processed by the bank. This statement typically details the beginning balance, total deposits, total withdrawals, any bank charges, and interest earned, culminating in the ending balance. It provides an external record of cash activity.
Complementing the bank statement is the company’s internal cash ledger or cash book. This record tracks all cash receipts and disbursements made by the business, reflecting the company’s perspective on its cash position, including its own ending cash balance.
Lastly, any prior period bank reconciliation statements are relevant, particularly for identifying unreconciled items that may still be outstanding. These could include checks written in the previous period that have not yet cleared the bank or deposits made that were not yet recorded by the bank.
Adjustments to the Bank Balance
Adjustments to the bank statement balance are often needed to reflect the company’s actual cash position. Deposits in transit are funds that a company has received and recorded in its internal records, but the bank has not yet processed or posted them to the account. Since the company has already accounted for these funds, they are added to the bank statement balance during reconciliation.
Outstanding checks are checks that the company has written and recorded as disbursements in its books, but they have not yet been presented to the bank for payment. Because the bank has not yet deducted these amounts, outstanding checks are subtracted from the bank statement balance.
Errors made by the bank also require specific corrections. Such bank errors could involve either adding to or subtracting from the bank balance to rectify the error.
Adjustments to the Book Balance
The company’s internal cash ledger, or book balance, also needs modifications to accurately reflect the true cash position. Bank service charges are fees levied by the bank for various services. These charges are typically deducted directly from the bank account by the financial institution and are often not known to the company until the bank statement is received. Therefore, these charges must be subtracted from the company’s book balance.
Interest earned on the account balance increases the company’s cash. This interest income may only appear on the bank statement. To accurately reflect the increased cash, any interest earned must be added to the company’s book balance.
Non-Sufficient Funds (NSF) checks occur when a check received by the company and recorded as a deposit is returned by the bank because the payer’s account lacks sufficient funds. Since the company initially recorded the check as an increase in cash, but the funds were not actually collected, the amount of the NSF check must be subtracted from the company’s book balance. Errors made by the company in recording cash transactions also necessitate adjustments to the book balance.
Completing the Calculation
The final step in determining the adjusted cash balance involves systematically applying all identified adjustments to both the bank balance and the company’s book balance. For the bank side, begin with the unadjusted ending balance provided on the bank statement. To this figure, add any deposits in transit. From this sum, subtract any outstanding checks. Additionally, any bank errors that reduced the company’s balance would be added back, while errors that inflated it would be subtracted. The result is the adjusted bank balance.
Similarly, for the company’s book side, start with the unadjusted ending cash balance from the internal ledger. Add any interest earned. Subtract bank service charges. Also, subtract any Non-Sufficient Funds (NSF) checks. Company errors that previously understated cash would be added, while those that overstated it would be subtracted. This yields the adjusted book balance.
The final adjusted bank balance and the adjusted book balance must precisely match. If these two figures do not reconcile, it signals that an error remains somewhere in the reconciliation process. This discrepancy requires further investigation to identify and correct the underlying mistake, ensuring that both internal records and external bank statements accurately reflect the true cash position of the business.