Checking Account Terminology

In this section we provide brief definitions of the terms commonly used when discussing checking accounts and bank reconciliations. We grouped the terms into the following categories:

• General terms for checking accounts
• Terms for adjustments to the balance per bank
• Terms for adjustments to the balance per books

General Terms for Checking Accounts

Checking accounts are known as demand deposit accounts since the bank must pay/return the depositors’ account balances (except for uncollected funds) on demand. Companies report the checking account balances as part of its cash. Companies should safeguard their checking accounts through internal controls, which includes timely bank reconciliations prepared by an independent person.

Checks are a company’s written orders to its bank to pay an amount from the company’s checking account. Hence, checks state “Pay to the order of ______”. The person or company named on the check is known as the payee. The payee is required to endorse (sign the back of) the check as evidence that the money was received. (In place of the endorsement, a bank can indicate that the amount was deposited/credited to the payee’s bank account.)

Cancelled checks are the checks the company issued and were paid by the company’s bank. Cancelled checks are also referred to as checks that “cleared” the bank account on which they are drawn.

Voided checks are checks that were written in error. These checks will have the word “VOID” clearly written across the front of the check.

Stop payment order is a company’s instruction to its bank to not pay a specific check that the company had already written but was not yet paid by the bank. Generally, the bank charges a fee for the special effort required by the customer’s order.

Deposits often consist of currency and checks (received from customers) that a company takes to its bank with instructions to add the amount to the company’s checking account. The bank records the deposit with the date the bank processes the deposit. (However, the company’s general ledger Cash account shows the date that the company had received the money from its customers or others.)

Authorized signers are a limited number of people designated to sign checks drawn on the company’s checking account. Their names and signatures appear on a bank signature card along with the approval of the company’s key officers.

Bank overdraft occurs when checks written by a company are presented to its bank for payment and the company’s checking account balance is not sufficient to pay the checks. If the checks were to be paid, the checking account balance would become a negative amount. Without a prior arrangement with the bank (such as an automatic loan), the bank will likely return or “bounce” the check back to the endorser. (The related terms NSF check and return item are described under Terms for Adjustments to the Balance per Books.)

Uncollected funds occur when a company deposits a check into its bank account, but the check is drawn on an account at a different bank. Since the company’s bank is not certain that the check will be honored by the bank on which it is drawn, the company’s bank will not allow the company/depositor to use the amount until the deposited check is paid by the other bank. (Some people refer to the amount of outstanding checks as the company’s float.)

Terms for Adjustments to the Balance per Bank

Outstanding checks are checks that a company had written and recorded in its Cash account, but the checks have not yet been paid by the company’s bank (or have not “cleared” the bank). It is common for a few checks written in earlier months to remain outstanding at the end of the current month.

Since the outstanding checks are not yet in the bank’s records/bank statement, the company’s bank reconciliation will show the outstanding checks as a subtraction from the balance per bank.

Deposits in transit are the cash and checks a company has received and recorded in its general ledger accounts, but the cash and checks have not been processed by the bank as of the date of the bank reconciliation. Deposits in transit are sometimes referred to as outstanding deposits.

Since the deposits in transit are not yet recorded in the bank’s records, the company’s bank reconciliation will show the deposits in transit as an addition to the balance per bank.

Bank errors are mistakes made by the bank that were discovered when the company prepared the bank reconciliation. While these items are rare, they do occur. For example, if a company issues a check for $867, but the bank paid the check at the incorrect amount of $876, there is a $9 bank error. This bank error will be shown on the company’s bank reconciliation as an addition of $9 to the unadjusted balance per bank (since the bank had reduced the bank account by $9 too much).

The company should immediately contact the bank so the bank can make the correction to the company’s checking account balance. (There is no entry made by the company since the company’s general ledger Cash account already contains the correct amount of $867.)

Terms for Adjustments to the Balance per Books

Bank credit memos indicate that the bank increased the balance in a company’s checking account. For example, if a bank lends $50,000 to a company, the bank is likely to deposit the loan proceeds in the company’s checking account by means of a credit memo.

A bank credit memo is recorded in the bank’s general ledger with a credit to the bank’s liability account Customers’ Deposits (causing this liability’s account balance to increase). The bank also debits its asset account Loans Receivable (causing this asset’s balance to increase).

If the bank’s credit memo was not recorded in the company’s general ledger accounts as of the date of the bank reconciliation, the company lists the credit memo amount as an adjustment to increase the balance per books. This adjustment must also be recorded in the company’s general ledger with a debit to Cash and a credit to Loans Payable or Notes Payable.

Bank debit memos indicate that the bank has decreased the balance in a company’s checking account. Examples include bank fees (service charge, overdraft fee, stop payment fee, etc.) and loan payments.

A bank debit memo is recorded in the bank’s general ledger with a debit to the bank’s liability account Customers’ Deposits (and a credit to another account).

If the amount of the debit memo was not recorded in the company’s general ledger accounts as of the date of the bank reconciliation, the company lists the debit memo amount as a decrease to the balance per books. This adjustment must also be recorded in the company’s general ledger with a credit to Cash and a debit to Bank Fees Expense.

ACH, EFT, Zelle transfers, and wire transfers can indicate additions to or subtractions from a company’s bank account without the company preparing a deposit slip or writing a check. ACH is the acronym for Automated Clearing House. EFT is the acronym for Electronic Funds Transfer.

If any of these transfers were not recorded in the company’s general ledger as of the date of the bank reconciliation, the company will list them on the bank reconciliation as adjustments to the balance per books. The company must record these transfers in its general ledger accounts.

NSF check is a check issued by a company, but the bank did not pay/honor the check because the company’s bank balance was less than the amount of the check. Unless the company had arranged for this situation, the company’s bank is likely to return the check to the endorser (instead of allowing the checking account to have a negative balance.) When the bank returns the NSF check, the check will be noted as Not Sufficient Funds (NSF) or Insufficient funds. An NSF check is also known as a check that “bounced” or as a “rubber check” (since the check is being bounced back by the bank).

Return item is typically a check that was not paid/honored by the bank on which it was drawn. A few examples include an NSF check, a check drawn on a checking account that was closed, and a check where the maker of the check has stopped payment.

Company errors may require additions or subtractions from the company’s general ledger Cash account. One type of error is a transposition error which involves the switching of digits within an amount. For example, the amount $789 might be incorrectly recorded as $798, resulting in a difference of $9. Perhaps $1,458 was recorded as $1,548, resulting in a difference of $90. Another type of error involves omitting or adding a zero, such as recording $500 instead of the actual amount of $5,000 (a difference of $4,500).

In these types of errors, the differences are evenly divisible by 9: $9/9 = 1; $90/9 = 10; $4,500/9 = 500. If your bank reconciliation does not balance and the difference is evenly divisible by 9, you may be able to rule out many amounts in your effort to identify the error.

Helpful Tip for Bank Reconciliation Adjustments

As a guide to listing the adjustments on the bank reconciliation, you may find the following is both helpful and easy to remember:

Two examples of this TIP are shown next.

Outstanding check
On May 30, Ott Company issued and recorded its check #147 for $100. However, the check was not paid by the bank as of May 31 (the day of the bank reconciliation). Since check #147 is in Ott Company’s general ledger Cash account, but isn’t on the May 31 bank statement, check #147 is an outstanding check that will be an adjustment to the Balance per BANK. The adjustment will be a deduction from the unadjusted balance per BANK.

Bank service charge
Generally, a company does not record the bank’s monthly service charge until the company reviews the monthly bank statement. In early June, SmithCo sees that the bank deducted $25 for the May service charge. Since the bank’s service charge is on the bank statement but isn’t in the company’s general ledger as of the May 31 bank reconciliation, the $25 service charge will be an adjustment to the Balance per BOOKS. The adjustment for the service charge is subtracted from the unadjusted balance per BOOKS.