How to Do a Cash Reconciliation: A Step-by-Step Process

Cash reconciliation is the process of comparing a company’s internal cash records with its bank statement to ensure the balances match. This practice verifies financial transaction accuracy and identifies any discrepancies. By reviewing cash inflows and outflows, businesses can detect errors, track unauthorized activity, and protect against potential fraud. This process supports informed financial decision-making and maintains financial reporting integrity.

Preparing for Reconciliation

Before beginning reconciliation, gather the bank statement and the company’s internal cash records, such as a cash ledger or check register, for the specific period. The bank statement outlines all transactions processed by the financial institution. The company’s internal ledger presents its own record of cash transactions. Ensure both the starting and ending cash balances from the bank statement and internal records are available, as these figures form the foundation for identifying and adjusting differences.

Performing the Reconciliation Steps

First, compare all deposits on the bank statement with those recorded in the company’s cash ledger. Mark off each matching deposit on both documents to indicate reconciliation. This helps identify deposits appearing in one record but not the other.

Next, compare all withdrawals, including checks and other debits, from the bank statement against payments in the company’s cash ledger. Tick off each matching withdrawal on both documents to ensure all bank-processed payments are accounted for.

After comparing common transactions, identify items on the bank statement not yet recorded in the company’s ledger. These often include bank service charges or interest earned on the account. Direct debits or credits initiated by the bank also require attention.

Simultaneously, identify transactions recorded in the company’s cash ledger that have not yet appeared on the bank statement. Common examples include outstanding checks and deposits in transit.

Finally, calculate the adjusted balances for both the bank and the company’s books. Begin with the ending balance from the bank statement and add or subtract the items identified in the previous steps that affect the bank’s side. Then, start with the ending balance from the company’s ledger and adjust it for items that affect the company’s books.

Addressing Discrepancies

After the comparison, several common discrepancies often arise that require specific adjustments. Deposits in transit refer to cash or checks the company has recorded as received and deposited, but the bank has not yet processed or credited to the account. These amounts are added to the bank statement balance.

Outstanding checks are payments issued by the company and recorded in its ledger but not yet presented to the bank for payment. These checks are subtracted from the bank statement balance.

Bank service charges, such as monthly maintenance fees or ATM fees, are deductions made by the bank that the company may not have recorded. These charges are subtracted from the company’s book balance.

Interest earned on the account is an addition made by the bank that may not yet be reflected in the company’s records. This earned interest is added to the company’s book balance.

Non-sufficient funds (NSF) checks, also known as bounced checks, occur when a check deposited by the company is returned unpaid because the issuer’s account lacks sufficient funds. The amount of the NSF check, along with any associated bank fees, must be subtracted from the company’s book balance.

Errors made by either the bank or the company also contribute to discrepancies. For bank errors, the company should contact the bank to initiate a correction. For company errors, an adjusting entry must be made in the company’s ledger to fix the mistake. After all these adjustments are accurately made, the adjusted bank balance should precisely equal the adjusted book balance, confirming a complete and accurate cash reconciliation.