Is reconciling the bank statement a task that causes you to shudder? Do you procrastinate reconciling the cash records to the monthly bank statement? Ideally, reconciling the bank statement is a task accomplished through specialized accounting software; however, understanding the underlying principles will lead to more accurate transactions entries and a bank reconciliation process that might just make you smile.
Reconciling the bank statement is simply comparing your organization’s cash records to the monthly statement provided by the bank. Your cash records, also known as your cash general ledger or GL, contain a list of all your cash transactions during the month. The deposits to the bank will be debits to your cash general ledger account. The checks will be credits to the cash general ledger. Bank service fees and check fees are some other cash withdrawal items and should be entered as credits to the cash account.
In a perfect world, the differences between the cash general ledger and the bank statement should be mostly timing differences. For example: an outstanding check written on July 31 will be a July transaction reflected in the cash GL, but may not appear on the bank statement until August. Resulting in a timing difference between the cash GL and the bank statement.
Deposits taken to the bank at 5:00 p.m. on July 31 will be listed on the cash GL as a July transaction but will most likely not be listed on the bank statement until August. This is known as a deposit in transit. This is also a timing difference between the cash GL and the bank statement.
Steps to Reconciling the Bank Statement
- Start with the balance on the bank statement:
|Bank Balance July 31|
|Add||Deposits in Transit|
|Add or Deduct||Bank Errors|
|Total||Adjusted/Corrected Bank Balance|
- Obtain the cash balance from the general ledger:
|Cash Balance from General Ledger July 31|
|Deduct||Bank Service Charges|
|Add||Interest paid by the bank on your cash balance|
|Add or Deduct||Errors in the organization’s cash account|
|Total||Adjusted/Corrected Cash Balance|
- Compare the adjusted totals. They should be the same. If not, identify the differences so that corrections and adjustments may be entered into the correct place.
- Finally, prepare the appropriate journals for the corrections and adjustments. A good rule is to enter the item where it is missing. For example, interest that appears on the bank statement will need to be entered in the cash general ledger. Deposits in transit or outstanding checks are simply noted as an adjustment to the bank balance. Those items will appear on the next statement but will already be included in the cash balance.
Bank reconciliation is an important tool in protecting your assets. In our imperfect world, mistakes happen. Reconciling the bank statement on a regular basis allows mistakes to be found and corrected, reflecting accurate data for reporting. In Part 2, I will examine how to find the differences between the adjusted bank balance and the adjusted cash balance and how to handle the list of adjustments.