Bank Reconciliation

Banks usually send customers a monthly statement that shows the account's beginning balance (the previous statement's ending balance), all transactions that affect the account's balance during the month, and the account's ending balance.

 

The ending balance on a bank statement almost never agrees with the balance in a company's corresponding general ledger account. After receiving the bank statement, therefore, the company prepares a bank reconciliation, which identifies each difference between the company's records and the bank's records. The normal differences identified in a bank reconciliation will be discussed separately. These differences are referred to as reconciling items. A bank reconciliation begins by showing the bank statement's ending balance and the company's balance (book balance) in the cash account on the same date.

Vector Management Group Bank Reconciliation April 30, 20X8

Bank statement balance

$ 8,202

Book balance

$ 6,370

Deposits in transit. Most companies make frequent cash deposits. Therefore, company records may show one or more deposits, usually made on the last day included on the bank statement, that do not appear on the bank statement. These deposits are called deposits in transit and cause the bank statement balance to understate the company's actual cash balance. Since deposits in transit have already been recorded in the company's books as cash receipts, they must be added to the bank statement balance. The Vector Management Group made a $3,000 deposit on the afternoon of April 30 that does not appear on the statement, so this deposit in transit is added to the bank statement balance.

Vector Management Group Bank Reconciliation April 30, 20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Outstanding checks. A check that a company mails to a creditor may take several days to pass through the mail, be processed and deposited by the creditor, and then clear the banking system. Therefore, company records may include a number of checks that do not appear on the bank statement. These checks are called outstanding checks and cause the bank statement balance to overstate the company's actual cash balance. Since outstanding checks have already been recorded in the company's books as cash disbursements, they must be subtracted from the bank statement balance.

Vector Management Group Bank Reconciliation April 30, 20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Less: Outstanding checks

1552

$1,057

1564

245

1565

108

1570

359

1571

802

Adjusted bank balance

Automatic withdrawals and deposits. Companies may authorize a bank to automatically transfer funds into or out of their account. Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable), monthly utility bills, or other liabilities. Automatic deposits occur when the company's checking account receives automatic fund transfers from customers or other sources or when the bank collects notes receivable payments on behalf of the company.

Banks use debit memoranda to notify companies about automatic withdrawals, and they use credit memoranda to notify companies about automatic deposits. The names applied to these memoranda may seem confusing at first glance because the company credits (decreases) its cash account upon receiving debit memoranda from the bank, and the company debits (increases) its cash account upon receiving credit memoranda from the bank. To the bank, however, a company's checking account balance is a liability rather than an asset. Therefore, from the bank's perspective, the terms debit and credit are correctly applied to the memoranda. If this still seems confusing, you may want to review the chart on page 19 and think about how the company classifies their account as an asset while the bank classifies the company's account as a liability.

A credit memorandum attached to the Vector Management Group's bank statement describes the bank's collection of a $1,500 note receivable along with $90 in interest. The bank deducted $25 for this service, so the automatic deposit was for $1,565. The bank statement also includes a debit memorandum describing a $253 automatic withdrawal for a utility payment. Unlike deposits in transit or outstanding checks, which are already recorded in the company's books, automatic withdrawals and deposits are often brought to the company's attention for the first time when the bank statement is received. On the bank reconciliation, add unrecorded automatic deposits to the company's book balance, and subtract unrecorded automatic withdrawals.

Vector Management Group Bank Reconciliation April 30,20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Add: Note collection plus interest less bank fee

$1,565

 

Less: Outstanding checks

1552

$1,057

1564

245

1565

108

1570

359

1571

802

1572

1,409

(3,980)

Adjusted bank balance

Because reconciling items that affect the book balance on a bank reconciliation have not been recorded in the company's books, they must be journalized and posted to the general ledger accounts. The $1,565 credit memorandum requires a compound journal entry involving four accounts. Cash is debited for $1,565, bank fees expense is debited for $25, notes receivable is credited for $1,500, and interest revenue is credited for $90.

 

 

If the Vector Management Group had previously made adjusting entries to accrue all of the interest revenue (by debiting interest receivable and crediting interest revenue), then interest receivable rather than interest revenue would need to be credited for $90 in the journal entry shown above.

The automatic withdrawal requires a simple journal entry that debits utilities expense and credits cash for $253.

 

 

Interest earned. Banks often pay interest on checking account balances. Interest income reported on the bank statement has usually not been accrued by the company and, therefore, must be added to the company's book balance on the bank reconciliation. The final transaction listed on the Vector Management Group's bank statement is for $18 in interest that has not been accrued, so this amount is added to the right side of the following bank reconciliation.

Vector Management Group Bank Reconciliation April 30,20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Add: Note collection

  plus interest

  less bank fee

$1,565

  Interest earned

18

 

 

Less: Outstanding checks

1552

$1,057

1564

245

1565

108

1570

359

1571

802

1572

1,409

(3,980)

Adjusted bank balance

The interest revenue must be journalized and posted to the general ledger cash account. In the journal entry below, cash is debited for $18 and interest revenue is credited for $18.

 

 

Bank service charges. Banks often require customers to pay monthly account fees, check printing fees, safe‐deposit box rental fees, and other fees. Unrecorded service charges must be subtracted from the company's book balance on the bank reconciliation. The Vector Management Group's bank statement on page 120 includes a $20 service charge for check printing and a $50 service charge for the rental of a safe‐deposit box.

Vector Management Group Bank Reconciliation April 30,20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Add: Note collection

  plus interest

  less bank fee

$1,565

  Interest earned

18

 

 

Less: Outstanding checks

1564

245

  Safe-deposit box

1565

108

  rental

50

1570

359

1571

802

1572

1,409

(3,980)

Adjusted bank balance

Although separate journal entries for each expense can be made, it is simpler to combine them, so bank fees expense is debited for $70 and cash is credited for $70.

 

 

NSF (not sufficient funds) checks. A check previously recorded as part of a deposit may bounce because there are not sufficient funds in the issuer's checking account. When this happens, the bank returns the check to the depositor and deducts the check amount from the depositor's account Therefore, NSF checks must be subtracted from the company's book balance on the bank reconciliation. The Vector Management Group's bank statement includes an NSF check for $345 from Hosta, Inc.

Vector Management Group Bank Reconciliation April 30,20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Add: Note collection

  plus interest

  less bank fee

$1,565

  Interest earned

18

 

 

Less: Outstanding checks

1564

245

  Safe-deposit box

1565

108

  rental

50

1570

359

  NSF Hosta, Inc.

345

1571

802

1572

1,409

(3,980)

Adjusted bank balance

Since the NSF check has previously been recorded as a cash receipt, a journal entry is necessary to update the company's books. Therefore, a $345 debit is made to increase the accounts receivable balance of Hosta, Inc., and a $345 credit is made to decrease cash.

 

 

Errors. Companies and banks sometimes make errors. Therefore, each transaction on the bank statement should be double‐checked. If the bank incorrectly recorded a transaction, the bank must be contacted, and the bank balance must be adjusted on the bank reconciliation. If the company incorrectly recorded a transaction, the book balance must be adjusted on the bank reconciliation and a correcting entry must be journalized and posted to the general ledger. While reviewing the bank statement, Vector Management Group discovers that check #1569 for $381, which was made payable to an advertising agency named Ad It Up, had been incorrectly entered in the cash disbursements journal for $318. This error is a reconciling item because the company's general ledger cash account is overstated by $63.

Vector Management Group Bank Reconciliation April 30,20X8

Bank statement balance

$8,202

Book balance

$6,370

Add: Deposits in transit

 

Add: Note collection

  plus interest

  less bank fee

$1,565

  Interest earned

18

 

 

Less: Outstanding checks

1552

$1,057

  Check printing

20

1564

245

  Safe-deposit box

1565

108

  rental

50

1570

359

  NSF Hosta, Inc.

345

1571

802

  Error check#1569

63

731

1572

1,409

(3,980)

Adjusted bank balance

Adjusted book balance

When all differences between the ending bank statement balance and book balance have been identified and entered on the bank reconciliation, the adjusted bank balance and adjusted book balance are identical.

Since the Vector Management Group paid Ad It Up $63 more than the books show, a $63 debit is made to decrease the accounts payable balance owed to Ad It Up, and a $63 credit is made to decrease cash.