Cash Management: How to Perform Bank Reconciliation

by Greg DePersio

2 min read

A bank reconciliation is an integral part of internal control procedures over cash. By reconciling the dollar amount listed on your bank statement with the dollar amount listed in your financial records, you will become aware of discrepancies due to timing issues, bookkeeping mistakes, and fraud. To perform a bank reconciliation, you will make manual adjustments to the dollar amounts reported. The end goal is to have the bank balance equal to the balance in your financial records.

Balance Per Bank

To begin, adjust the balance reported by the bank. The easiest way is to note the ending balance in a spreadsheet and manually adjust figures. Adjusting the bank balance portion of the bank reconciliation will not require any adjusting entries – only manual changes to the figure reported by the bank. The starting balance of your reconciliation will be the ending balance on the bank statement. First, add the balance of deposits in transit to your starting balance. These outstanding cheques are items you’ve received and accounted for. However, they are on the way to the bank for deposit, so the bank has not included them in your bank balance yet. Similarly, deduct the balance of outstanding cheques you wrote. In your records, you reflect that you have made payments, but if the cheques haven’t been cashed yet, you must subtract them from your bank balance. Be aware of any errors the bank might have made. If you notice any incorrect deposits or typos, alert your bank to perform the proper adjustments.

Balance Per Books

To adjust the balance per books, locate the cash balance reported on the same day as the bank reconciliation. Then, account for the following items by entering the appropriate journal entries:

  1. Deduct any bank fees or service charges. These items are automatically incurred on the bank’s side, and you probably didn’t receive notification when the expenses were deducted.
  2. Deduct any fees relating to NSF cheques or fees associated with bounced cheques you tried to cash.
  3. Add a journal entry to recognize the interest revenue earned. This amount would have been automatically applied to your account without notice.
  4. Adjust your records for any cheques collected by the bank. These are items related to a payment box that the bank manages on your behalf.
  5. Check for errors in your cash account, including transposition errors.

Posting Journal Entries

All the adjustments for your books will require the entry of an adjusting entry. If your cash balance is too low, your entry will require a debit to cash. For example, when the bank posts interest revenue to your account, you do not have any record of this in your financial statements. You must debit cash 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 are not, there are items that have not been accounted for. When the balances do not match, investigate whether this is a result of an error, an incorrect omission, incorrect reconciliation dates, or fraud.

References & Resources

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