The bank reconciliation for a company's checking account begins with the company noting the balance per the bank statement and then making some notations about that balance. For example, the balance on the bank statement is probably not the amount that appears in the company's records. In all likelihood the checks written by the company in the days immediately before the date of the bank statement will not have cleared (been deducted from) the checking account. These are called outstanding checks. Another possibility is that the company received money on the closing date of the bank statement and properly recorded the amount in its records. However, the money was deposited into the bank too late in the day and will appear on the next bank statement. This is known as a deposit in transit. Let's begin the bank reconciliation by assigning some amounts to the items just mentioned:
Balance per bank statement at October 31 $6,442.56; outstanding checks as of October 31 $3,400.00; deposits in transit at October 31 $1,000.00. The adjusted balance per the bank statement on October 31 is $4,042.56 ($6,442.56 + $1,000.00 - $3,400.00).
Next, the bank reconciliation requires that the amount in the company's records (for this bank statement account) be noted. In all likelihood the amount in the company's records will not agree with the adjusted bank amount. One explanation could be the bank fees that the bank took out of the checking account, but the fees were not yet recorded in the company's records. A common example is the bank service charge for maintaining the checking account, handling returned checks, and check printing fees. The bank might also deduct loan payments or process other transactions that the company has not yet entered into its records. Let's illustrate the company's adjusted balance with some amounts:
Balance per the company's records (account register, general ledger account) $4,340.56; bank service charge $63.00; check printing charge $120.00. The adjusted balance per the company's records, or per books, is $4,157.56 ($4,340.56 - $63.00 - $120.00).
If the adjusted balance per the bank agrees with the adjusted balance per the books, the bank reconciliation is completed. In our example, the adjusted balance per the bank is $4,042.56 and the adjusted balance per the company's books is $4,157.56. The difference of $115.00 means that the bank reconciliation is not completed. The $115.00 difference must be identified. Finding the difference is likely to be tedious, but it must be done. After all differences have been identified, any adjustments to the company's balance must be entered into the company's records with a journal entry. It is the reconciled, adjusted balance that is to be reported on the company's balance sheet.
As mentioned above, performing a bank reconciliation is necessary for the accuracy of the accounting records and for the company's financial statements. Bank reconciliations are also associated with a company's internal controls over cash. If the bank reconciliation is performed by someone other than the authorized check signers and record keepers, the company has improved its internal control over cash.
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