Cash: Bank Reconciliations

For many students, bank reconciliations are a difficult topic because most people don’t do them anymore. Twenty years ago, before debit cards and online banking, there was only one way to keep track of how much money you had in the bank: keep a checkbook and reconcile it.

Clearly, online banking has not made us better at managing our bank accounts. In 2012, U.S. consumers paid $32 billion in overdraft fees. That’s approximately $135 per adult in the United States! Maybe we should consider going back to writing down all our transactions and balancing our checkbooks!

What is a bank reconciliation?

A bank reconciliation is a monthly process by which we match up the activity on the bank statement to ensure that everything has been recorded in the company’s or individual’s books. As we all engage in more automatic and electronic transactions, this is a critically important step to ensure that the cash balance is correct.

There are two parts to a bank reconciliation, the book (company) side and the bank side. When the reconciliation is completed, both balances should match.

What are we looking for?

There are a number of items that can cause differences between your book and bank balances. Here is a list of the most common items you’ll encounter when doing a bank reconciliation:

  1. Deposits in Transit – A deposit in transit is a deposit that has been submitted to the bank but has not get been recorded by the bank. The account holder has recorded the deposit in his records but the bank has not. This occurs because a deposit was submitted after the bank closed for the day or because of lag in electronic deposits. We see this a lot with credit card deposits because there is typically a 1-3 day lag in the time the card is processed and when the funds are deposited to the merchant’s account. Deposits in Transit must be added to the bank side of the reconciliation because they have been added to the book side when the deposits were recorded by the company.
  2. Outstanding Checks – These are checks that have been written by the company but have not yet cleared the bank. When a check is written it takes a few days to clear. Most businesses have a number of outstanding checks at the end of the month. Outstanding Checks should be subtracted from the bank side of the reconciliation because they were subtracted from the book balance when the checks were written.
  3. Bank Service Charges – These are amounts that the bank withdraws from the account as a charge for having the account. Bank service charges include regular monthly fees, overdraft fees, returned check fees and credit card processing fees. Typically, the company does not record these fees until the bank statement is received. Bank service charges are subtracted from the book balance since they are a decrease in the account balance and have not yet been recorded.
  4. Interest Earned – Some banks pay interest on account. The account holder does not know how much the interest will be until the bank statement is received. Interest earned is deposited into the account by the bank causing the balance to increase. Interest earned is added to the book balance to reflect the increase in the balance from the deposit of interest.
  5. Returned Checks – A returned check is an item that was originally deposited into the company’s account (usually a customer check) and later bounced. When this happens the bank withdraws the funds from the company’s account and sends a notice to the company. Returned checks should be subtracted from the book balance since the bank removed the amount from the balance when the check bounced.
  6. Recording Errors – A recording error occurs when the company incorrectly records a transaction or when the bank clears an item for the incorrect amount. This sometimes occurs when checks are written and an incorrect amount is entered into the system. Sometimes the bank clears the transaction for the wrong amount. Say the company wrote a check for $452.00 but the bank cleared the check for $450.00. There is now a $2 error in the books. Since the bank has cleaned the transaction, you must adjust the books to match. Recording errors should be added or subtracted from the book balance. If the item cleared the bank for less than the amount in the books, add the amount of the error. If the item cleared the bank for more than the amount in the books, subtract the amount of the error.
  7. Other Unrecorded Items – With the number of transactions that occur digitally or automatically, it’s easy to forget to record transactions, especially if they occur infrequently. Look for remaining items that cleared the bank that have not been recorded on the books. Other unrecorded items can be either deposits or withdrawals. All other unrecorded items should be recorded on the book side of the reconciliation. To determine if you should add or subtract the item, mimic what the bank did. If the bank added it to the account balance, do the same to the book balance. 

How to start

To do a bank reconciliation, you’ll need a copy of the bank statement and a copy of all of the outstanding items in the checking account through the ending date of the bank statement. For some businesses, including my own, the bank statement does not close at the end of the month. Sometimes the statement end date is based on the date the account was opened.

Once you have those two items, use a pencil or highlighter to mark off all the items that appear on both the bank statement and the check register. If an item appears on both, that means that the item was properly recorded and has cleared. After going through all the items, anything that remains unmarked is a an item that will need to be dealt with in the reconciliation.

Create two columns on a piece of paper or use a spreadsheet to do the calculations for you. My bank reconciliations look like a large T-account.

Start by writing the ending balance for the book and the bank under the appropriate column.

BR1

I like to do the bank side first because it is generally easier than the book side. You are only dealing with outstanding checks and deposits in transit on the bank side. List the deposits in transit and the outstanding checks. Add the deposits in transit to the beginning balance and subtract the outstanding checks.

BR2

The bank side is relatively easy to do. That is why I like to do that side first. It is more likely to be correct if you have an error in your reconciliation. Most students who have errors have them on the book side. Being confident in the bank side helps resolve errors on the book side.

On the book side, most items are fairly simple. Subtract bank service charges and add interest income. Subtract returned checks. Add unrecorded deposits and subtract unrecorded withdrawals. The last item, recording errors, requires a bit more thinking.

Let’s imagine that you recorded a check for $715, but the bank cleared that check for $751. The check was used to pay for utilities and was recorded to utilities expense for $715. If the check cleared for $751, what happened to your utilities expense? Did it increase or decrease? It increased because more was paid for utilities. If the expense increased, cash must have decreased. Therefore, cash must be adjusted down or decreased by $36. This would be subtracted from book side of the reconciliation.

Thinking about what is happening to your expenses can help you work your way through the problem.

Once you have worked through all the remaining items on the book side, compute the reconciled balance for the books.

BR3

When you are finished, the reconciled balances should agree.

If they do not, take the difference between the two balances. Does that amount stick out in your mind. Check to see if there is a missing item for that amount that you might have forgotten to record. You may have forgotten multiple items. Place them in the reconciliation and see if you now balance.

If you do not have an item for that amount, take the difference and divide it by 2. Look for that amount. If that amount appears in your reconciliation, you added (or subtracted) the amount when you should have subtracted (or added) the amount. Reverse the sign and check your balance again.

Once you finish the bank reconciliation, there is one more step in the process. All the items that you recorded on the book side of the reconciliation must be recorded in the company’s accounting system. Prepare a journal entry (or several) to record those items. I usually record one large journal entry but you can also record a separate entry for each item in the reconciliation. Only record items on the book side!

Bank reconciliations become easier as you do more of them. Get all the practice you can. Here is the bank reconciliation problem I created for the video on this subject. You are provided with the check register and the bank statement. See if you can complete the reconciliation before watching the video.

BR4

Related Videos:

How to do a bank reconciliation

Journal entries for the bank reconciliation

About the Author Kristin

Kristin is a Certified Public Accountant with 15 years of experience working with small business owners in all aspects of business building. In 2006, she obtained her MS in Accounting and Taxation and was diagnosed with Hodgkin's Lymphoma two months later. Instead of focusing on the fear and anger, she started her accounting and consulting firm. In the last 10 years, she has worked with clients all over the country and now sees her diagnosis as an opportunity that opened doors to a fulfilling life. Kristin is also the creator of Accounting In Focus, a website for students taking accounting courses. Since 2014, she has helped over one million students succeed in their accounting classes.

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  • I am struggling to understand the DEPOSIT IN TRANSIT recording. I have the amount in my books, but it’s not in the bank yet…that I get. Understanding how to square them up is where I am lost. If I Dbt A/R and Cr Cash, then I am taking the cash away from my company, even though the company has recorded it. To add to the confusion, won’t the DIT be an outstanding item on my Bank Rec? What happens to the DIT in the following month when it finally shows up on the Bank Statement and I’ve already recorded it in my prior month’s receipts? Thank you for your clarifying this for me.

    • Kristin says:

      You will add the DIT to the bank side of the reconciliation. No additional journal entry is needed because you only journalize items on the books side of the reconciliation. Next month, you will start your reconciliation with the ending book balance and the ending bank balance for that month. If the DIT cleared the bank, it will be included in the ending bank balance on the statement. It will also be included in the ending book balance.

      Let me know if you have any additional questions to help clarify.

  • Nanai says:

    the cash book and a bank statement do not reconcile even when i perform all the above steps and trial and error ….what might be the problem?

    • Kristin says:

      Nanai,

      There might be a few things. Are you off by a large amount or a small amount? When I get really frustrated with a reconciliation, I typically start from scratch. Rather than reviewing the numbers you have written down, start over. Another thing you can try is to put the amounts on flash cards and try placing the amounts in the pile (book or bank) that you believe they should be in. If you are still having trouble, email help@accountinginfocus.com. Make sure to send the homework problem you are working on and the work you have done.

  • Khai says:

    This is fucking intelligible. Thank you so much!

  • Nada says:

    Hello Kristin,

    The way you explained the topic is great! thank you, you certainly made it a lot easier!

    There’s a part I’m struggling with though, I can’t seem to work with problems that asks for the “Balance per book”
    before any adjustments. Is it possible you post the rule to be followed when working on this?

    Thank you

    • Kristin says:

      Nada,

      The balance per book is the ending balance in your check register. Look at the last transaction in the books and use that balance.

  • Yamkela says:

    How do I reconcile a cheque that is replaced with another and also increased?Talking about Bank reconciliation.

    • Kristin says:

      Yamkela,

      You would need to void the first check (do a reversing entry to credit cash and debit the expense) and then enter the new check.

  • Pratyush says:

    what is the journal entries for booking DIT entries. If the bank statement balance shows negative balance then how it affects Dit entries.

    if cash book opening balance is not matching with passbook is it required to first adjust the opening balance I.e post all the missing transaction. then leave all the os checks as open items

    • Kristin says:

      There would be no journal entry for DIT because you do not journalize the items outstanding on the bank side of the transaction. The opening balance will almost never match the statement balance.

  • Carol D. says:

    I have a question, I cant get my bank to match my GL. The bank had made a mistake and debited us in error of mistaking two checks as one, this was on the 29th, on the 4th they credited us back the money. The original Debit is a Deposit in transit? and where would that go on the “Book” Side. I am stumped 🙁

  • Duyen Luong says:

    Dear Kristin,
    According to what I know about bank statement, checks paid and other debits will reduce the balance of the depositor’s account. And deposits and other credits will increase the balance. But I see on your lecture, the one you posted on youtube, the bank statement and the cash register have the same credit side whenever checks paid. I am not clear about that. I will appreciate if you can help. Thank youm

    • Kristin says:

      I’m not sure what you mean by “credit side”. Checks and debits reduce the balance no matter which side of the reconciliation they are on. Also, don’t confuse the format I use with a T-account. It’s just a way to organize the information.

  • Mehrab Sayem says:

    Is it possible that some of the items in the cashbook will not be in bank statement, and some items in the bank statement will not be in cashbook?

  • elton says:

    what do you do with the previous income appearing on the current statement

    e,g if i deposited 12430 on April this amount appears on May statement what do i do about it when i do bank reconciliation

    • Kristin says:

      You wouldn’t do anything with it. On the April reconciliation, it would have been listed as a deposit in transit on the bank side of the reconciliation. Since it cleared in May and would have already been included in your book balance, no further action is required.

  • kabakundajr says:

    How do i treat unrecorded items in the cashbook but are appearing in the bank statement. do i added the figure under unpresented cheques in the bank reconciliation

    • Kristin says:

      You need to record them all via journal entry. If they decrease the balance, credit cash and debit the appropriate account. If they increase the cash balance, debit cash and credit the appropriate account.

  • Joel says:

    Does cash sales appears on bank reconciliation statement or in the adjusted cash book. How do treat cash sales in the bank reconciliation statement?

  • Reb says:

    I am trying to reconcile zero balance bank accounts and no matter what I do I cannot get them to balance to my GL. Any suggestions

  • Don Hoffhine says:

    Two vendors we no longer do business with have posted ACH debits against our bank account. We have 0 balances with both vendors, so these are errors where they need to return our funds. We’re on a modified cash basis. I know we have to reduce the cash on the book side, but there is no expense. So do we set up receivables for these until they repay us?

    • Kristin says:

      I would assume that the charges will get reversed quickly, therefore, I would not set up a receivable. If anything, I would just reverse the charge in your system. Typically, when you notify a company of something like this, the charge gets fixed in a few days.

      • Don Hoffhine says:

        Thank for your reply. So let me see if I understand correctly. On the bank reconciliation, it would be listed as an error that would be ok to have as a reconciling item to explain why the GL cash balance is higher than the bank balance?

        • Kristin says:

          Correct. Consider it a deposit in transit. You know the money is coming very soon.

          • Don Hoffhine says:

            Thank you again. I’m on a volunteer finance committee where we meet only once per month to review condominium finances and can only see the month end reconciliation. The accounting is done by an outside service that serves many organizations, not just ours. They’re likely not checking our bank activity daily. I would agree that the “deposit in transit” treatment is realistic for an item that was posted on the 29th of the month, but I’m thinking it’s not for the 2nd one that’s dated the 1st of the month–it’s too old!! I’d like your help on deciding where to draw the line. Possibly anything still outstanding beyond 5 banking days? Or because of the other circumstances I mentioned, should we insist on the receivables treatment for everything?

          • Kristin says:

            Why would it take so long to receive the refund? I can’t make that decision for you. That is something your organization must decide.

  • Pratik says:

    Why we have to subtract uncollected cheques from BRS when starting point is balance as per cash book?

  • darlene says:

    i recorded a telephone payment incorrectly and the bank statement shows the correct amount of payment being withdrawn. how do I correct?

  • Kristin says:

    What system are you using? Did you record too much or too little?

  • DxDD says:

    in month of june nothing found in the book accounts but in bank statement theres plenty amount of withdrawals i cant balance it fufu

  • Timothy says:

    pls what do mean by “cleared the bank for less”

  • PAPIS says:

    Hi Kristen

    I work for a major corroboration and I have a bank Recs problem I tried all that I could to balance this but no way Abdou the amount is pretty huge. I can use some help please email me back before Tuesday if possible

  • PAPIS says:

    My apologies for the spelling errors.

  • Abhishek Dayal says:

    How to treat a void sale which has been already recorded in the company books and not show in the bank statement.?

    • Kristin says:

      If you void a sale, you need to credit cash and debit the income account. The sale should be voided before the reconciliation begins.

  • Jp says:

    What do I do if my outstanding checks are less than my gl balance?

  • Sarita says:

    Hi ! How would on e record a deposit in transit that clears the bank for a different amount than recorded on the books when it turns out the banked amount is correct? Does it warrant a revision to the booked month’s bank reconciliation or just as an adjustment in the subsequent month?

    • Kristin says:

      You would adjust it in the following period, especially if you closed the books for the month. Onec you reconcile a month, you should not go back and make changes.

  • Shannon says:

    Hi! I am trying to figure out how to post a check that was actually a debit without a check number to the bank rec and not sure what I am doing wrong. Says I need a check number but since It was actually a debit there are no check numbers. Can someone help?

  • Lakshay Chandan says:

    Can some help me with this? Cheque no. 998 is returned with the bank statement. The cheque was made for $350, the correct amount owing for office expense. The cheque was recorded in the company records as $450.

    • Kristin says:

      If you are confused about what to do from the bank perspective, think about what to do from the expense perspective. If you have $450 in the expense account and you need $350 in the expense account, how do you fix that? Once you figure that out, it will give the answer on how to fix cash.

  • Christopher Giraldo says:

    Hello, I have a problem with the errors questions on my accounting work with this topic. For example these question, (1).. Check for $390 incorrectly recorded by the company as $930. (2) Check for $50 incorrectly charged by bank as $500. (3) A check for $180 in payment of an account was erroneously recorded in the check register as $810. May you help explain how to identify the errors will be added or deducted. Thank you

  • Mandy says:

    When do we use uncredited deposit and deposit in transit?Is there a difference between them?

    • Kristin says:

      Uncredited deposit is not a term we use in the U.S. We use deposit in transit. From a quick google search, they seem to be the same thing. Deposit in transit is used on the bank side of the reconciliation when a deposit has been recorded on the books but has not been recorded by the bank.

  • karen says:

    hi what will i do to amount that is deposited march then recorded in the book by april??

    • Kristin says:

      In real life, we would change the date of the transaction.

      In the classroom, I would record a journal entry to record the deposit in March and then do a reversing entry to undo the effect of that transaction. You would reconcile the credit to cash from the reversing entry against the debit to cash from the April deposit entry.

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