In accounting, cash includes coins; currency; undeposited negotiable instruments such as checks, bank drafts, and money orders; amounts in checking and savings accounts; and demand certificates of deposit. A certificate of deposit (CD) is an interest-bearing deposit that can be withdrawn from a bank at will (demand CD) or at a fixed maturity date (time CD). Only demand CDs that may be withdrawn at any time without prior notice or penalty are included in cash. Cash does not include postage stamps, IOUs, time CDs, or notes receivable.

Most companies use checking accounts to handle their cash transactions. The company deposits its cash receipts in a bank checking account and writes checks to pay its bills. Keep in mind, a bank account is an asset to the company BUT to the bank your account is a liability because the bank owes the money in your bank account to you.  For this reason, in your bank account, deposits are credits (remember, liabilities increase with a credit) and checks and other reductions are debits (liabilities decrease with a debit).

The bank sends the company a statement each month. The company checks this statement against its records to determine if it must make any corrections or adjustments in either the company’s balance or the bank’s balance.   A bank reconciliation is a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company’s books. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger.

Bank Statement

A bank statement is a record of your bank account transactions, typically for one month, prepared by the bank.  A bank statement looks like this:

Paid checks. If canceled checks (a company’s checks processed and paid by the bank) are returned with the bank statement, compare them to the statement to be sure both amounts agree. Then, sort the checks in numerical order. Next, determine which checks are outstanding. Outstanding checks are those issued by a depositor but not paid by the bank on which they are drawn. The party receiving the check may not have deposited it immediately. Once deposited, checks may take several days to clear the banking system. Determine the outstanding checks by comparing the check numbers that have cleared the bank with the check numbers issued by the company. Use check marks in the company’s record of checks issued to identify those checks returned by the bank. Checks issued that have not yet been returned by the bank are the outstanding checks. If the bank does not return checks but only lists the cleared checks on the bank statement, determine the outstanding checks by comparing this list with the company’s record of checks issued. Sometimes checks written long ago are still outstanding. Checks outstanding as of the beginning of the month appear on the prior month’s bank reconciliation. Most of these have cleared during the current month; list those that have not cleared as still outstanding on the current month’s reconciliation.

Bank debit and credit memos. Verify all debit and credit memos on the bank statement. Debit memos reflect deductions for such items as service charges, NSF checks, safe-deposit box rent, and notes paid by the bank for the depositor. Credit memos reflect additions for such items as notes collected for the depositor by the bank and wire transfers of funds from another bank in which the company sends funds to the home office bank. Check the bank debit and credit memos with the depositor’s books to see if they have already been recorded. Make journal entries for any items not already recorded in the company’s books.

Bank Errors.  Sometimes banks make errors by depositing or taking money out of your account in error.  You will need to contact the bank to correct these errors but will not record any entries in your records because the bank error is unrelated to your records.

Book Errors. List any Book errors. A common error by depositors is recording a check in the accounting records at an amount that differs from the actual amount. For example, a $47 check may be recorded as $74. Although the check clears the bank at the amount written on the check ($47), the depositor frequently does not catch the error until reviewing the bank statement or canceled checks.

Deposits in transit, outstanding checks, and bank service charges usually account for the difference between the company’s Cash account balance and the bank balance.

Watch the following video example and then we will continue by looking at bank statement and records of MY COMPANY (click My Company) for a printable copy.

After comparing the bank statement and records of My Company, you should have identified the following reconciling items:

1. Deposit in transit dated 9/30 for $6,700.
2. Outstanding checks #2004, 2008, 2009, 2012.
3. Interest paid by the bank $3.
4. Note collected by bank $3500 less $500 fee
5. Bank service charge $5
6. Customer NSF $350
7. Error in Check #2005 correctly processed by bank as $5,843 but recorded in our records as $5,483.  This is a difference of $360 (5,843 – 5,483) and since we did not take enough cash we need to reduce cash by $360.

Using the chart provided above and the reconciling items, the bank reconciliation would appear as follows: