Where Do Outstanding Checks Go on a Bank Reconciliation?
Understand bank reconciliation to ensure financial statement accuracy. Learn to account for differences between bank and company records.
Bank reconciliation is a fundamental accounting process that ensures the accuracy of a company’s financial records by comparing its internal cash balance with the balance reported by the bank. This procedure helps identify discrepancies, errors, or unrecorded transactions. Performing regular reconciliations provides a clear picture of an entity’s true cash position and is typically conducted monthly to maintain up-to-date financial information.
Understanding Outstanding Checks
An outstanding check is a payment a company has issued and recorded in its accounting records but has not yet been presented to or cleared by the bank. This means the company has already reduced its cash balance internally, but the bank has not yet processed the deduction. This creates a temporary difference between the company’s cash balance and the bank’s reported balance.
Checks become outstanding due to a timing difference. For example, a company might issue a check to a vendor on the last day of the month, and while the company immediately records this payment, the vendor may not deposit it until the next business day. Until the recipient deposits the check and the bank processes it, the bank’s balance will appear higher than what the company’s books show.
Outstanding checks can lead to an overstatement of the available cash balance according to the bank. This could result in poor cash flow management decisions, such as accidentally overdrawing the account. Therefore, accurately tracking these checks is important for maintaining precise financial records and ensuring the reported cash balance reflects the true amount of available funds.
Adjusting the Bank Balance
When preparing a bank reconciliation, outstanding checks are handled as a deduction from the bank statement balance. This adjustment is made because the bank’s records do not yet reflect these payments, even though the company has already disbursed the funds. The goal is to adjust the bank’s ending balance to reflect all transactions that have occurred.
To perform this adjustment, a company identifies all checks recorded in its accounting system that do not appear on the current bank statement. This is typically done by comparing the company’s check register or disbursement records against the cleared checks listed on the bank statement. The total amount of these uncleared checks is then subtracted from the ending balance shown on the bank statement.
This deduction is necessary to reconcile the bank’s balance with the company’s records because it accounts for money that has effectively left the company’s control. By subtracting outstanding checks from the bank balance, the adjusted bank balance moves closer to reflecting the actual cash available, aligning it with the company’s internal cash records. No journal entry is required for outstanding checks on the company’s books, as the cash reduction was already recorded when the checks were originally issued.
Completing the Reconciliation
Outstanding checks are one component within the broader process of completing a bank reconciliation, which aims to bring the adjusted bank balance and the adjusted book balance into agreement. After deducting outstanding checks from the bank statement balance, other common adjustments are also considered. For instance, deposits in transit, which are funds recorded by the company but not yet by the bank, are added to the bank balance.
On the other side of the reconciliation, adjustments are made to the company’s book balance for items that the bank has processed but the company has not yet recorded. These typically include bank service charges and interest earned on the bank account. Interest increases the cash balance and requires an addition to the book balance.
Additionally, non-sufficient funds (NSF) checks, which are checks deposited by the company that later bounce due to insufficient funds in the payer’s account, necessitate a deduction from the book balance. Any errors made by either the bank or the company also require adjustments to the respective balances. Once all necessary adjustments have been made to both the bank’s balance and the company’s book balance, these two adjusted figures should precisely match, confirming the accuracy of the cash records.