How to Do a Bank Reconciliation for Accounting

A bank reconciliation compares a company’s cash records with its bank statement to identify and explain differences at a specific point in time, usually month-end. This process ensures the accuracy of financial statements and helps safeguard against errors or unauthorized transactions. Regularly aligning these balances provides reliable financial data for decision-making and reporting.

Understanding Key Elements for Reconciliation

Performing a bank reconciliation requires two documents: the company’s cash ledger (or accounting software records) and the bank statement. The company’s cash ledger provides a detailed, internal record of all cash receipts and disbursements. Conversely, the bank statement offers an external, independent record of all transactions that have cleared the bank account.

Several common items cause discrepancies between these two records. Deposits in transit are cash or checks the company has recorded but the bank has not yet processed. This makes the company’s cash balance appear higher than the bank’s until cleared, usually within one to two business days. Outstanding checks are those the company has written and recorded, but recipients have not yet presented them to the bank. Until these clear, the bank’s balance will appear higher than the company’s records.

Bank service charges are fees deducted by the bank for services like account maintenance or wire transfers. These fees are often unknown to the company until the bank statement arrives. Interest earned is income paid by the bank on the account balance, visible on the bank statement. Non-sufficient funds (NSF) checks occur when a deposited check is returned due to inadequate funds in the customer’s account. The bank deducts the amount from the company’s account, often with a fee.

Bank errors, such as an incorrect deposit or unauthorized withdrawal, affect the bank statement balance and are the bank’s responsibility to correct. Company errors, like recording an incorrect amount or omitting a transaction, impact the company’s internal cash balance.

Performing the Bank Reconciliation Steps

The reconciliation process begins by obtaining the most recent bank statement and the company’s cash ledger for the same period. The objective is to adjust both the bank’s balance and the company’s book balance until they agree.

Start by taking the ending cash balance reported on the bank statement. This is the initial point for bank-side adjustments. Identify deposits the company recorded that do not appear on the bank statement. These deposits in transit are added to the bank statement balance, as the bank has not yet processed them.

Next, review all checks issued by the company that have not yet cleared the bank. These outstanding checks are subtracted from the bank statement balance because the bank has not yet deducted these amounts. Any identified bank errors, such as a mistakenly credited deposit, must also be corrected on the bank side. If the bank mistakenly added funds, subtract them; if it mistakenly deducted funds, add them back.

Shift focus to the company’s internal records, starting with the ending cash balance from the general ledger. This represents the company’s current cash position. Add any interest income or direct collections made by the bank that have not yet been recorded. These amounts increase the company’s cash balance.

Subtract bank service charges and any non-sufficient funds (NSF) checks, which the bank has already deducted but the company has not yet recorded. These items decrease the company’s cash balance. Finally, correct any errors made in the company’s records. For example, if a $200 payment was recorded as $20, the cash balance needs to be reduced by $180. The final, adjusted bank balance and the final, adjusted book balance must match, confirming all discrepancies are accounted for and records are aligned.

Recording Adjustments After Reconciliation

After completing the bank reconciliation and ensuring adjusted balances match, update the company’s accounting records. Only items affecting the company’s book balance require adjusting journal entries. Items solely impacting the bank’s records, like deposits in transit, outstanding checks, or bank errors, do not need internal journal entries because the company has already correctly recorded them.

For instance, bank service charges subtracted from the book balance must be recorded in the general ledger. A typical journal entry debits Bank Service Charge Expense and credits Cash, reducing the company’s recorded cash. These adjustments ensure expense accounts accurately reflect costs.

Similarly, interest income added to the book balance requires an adjustment. This involves debiting Cash and crediting Interest Income, increasing reported cash and recognizing revenue.

When an NSF check is identified, the company must reverse the original deposit. This involves debiting Accounts Receivable (or an NSF Receivable account) and crediting Cash, increasing the amount owed by the customer and decreasing cash.

Any company errors discovered during reconciliation demand corrective journal entries to bring the cash account to its accurate figure. For example, if a payment was understated, a journal entry would reduce cash and increase the relevant expense or liability. These adjusting entries maintain the integrity of financial statements, ensuring the cash balance accurately reflects available funds and all related revenues and expenses are recognized.