A bank reconciliation compares the amounts that are on the bank statement with the amounts in the company's general ledger Cash account. The goal is to be certain that the correct amount is reported as the balance in the company's Cash account. (If the Cash account balance is incorrect, the balance in another account is also incorrect due to double-entry accounting.)
Often the company's cash account is not correct because there are some transactions appearing on the bank statement that have not yet been recorded. For example, the bank service charge, check printing fee, returned checks, returned check fees, loan payments, and interest earned are on the bank statement but are not yet recorded in the company's Cash account. These items must be entered in the company's Cash account and in another account because of double-entry accounting. For example, a bank service charge will need to be entered on the company's books by crediting the Cash account and debiting Bank Service Charge Expense or Miscellaneous Expense. A customer's check that has been returned NSF (not sufficient funds) must be entered in the company's accounts with a credit to Cash and a debit to Accounts Receivable.
Typically, the balance on the bank statement is also not the correct amount of the company's cash. The reason is that some of the amounts in the company's general ledger have not yet been processed by the bank. For example, as soon as a company writes a check, it will appear as a credit in the company's Cash account. However, the check might take a week before it reaches the bank for payment. These outstanding checks must be deducted from the balance on the bank statement in order to get to the correct amount of the company's cash. Occasionally, there will be a day or two lag between the date the company records a receipt in its Cash account and the time it gets posted to the bank's checking account records. These deposits in transit must be added to the bank statement balance in order to determine the correct balance of cash.
After the adjustments (and perhaps corrections of errors) are made to the balance of the company's Cash account and to the balance per the bank statement, the two adjusted balances should agree. If they are the same, you have reconciled the bank statement.
Petty cash is a small amount of cash that is available for paying small amounts without requesting and issuing a check. If the petty cash fund is "imprest" at $100, the company's general ledger account Petty Cash should always have a balance of $100. At the end of each accounting period and whenever the currency in the petty cash fund is low, the petty cash fund is replenished. To replenish the fund, a check is drawn on the company's Cash account and is cashed at the bank. The amount of the check is the amount needed to get the currency and coins on hand to be equal to the imprest amount. Note that the Cash (not Petty Cash) account is credited for the amount of the check. The amounts on the petty cash receipts or petty cash vouchers are debited to the appropriate accounts such as postage expense, travel expense, etc. Any difference between the amount of the check and the amount of petty cash receipts is recorded in the Cash Short and Over account (a miscellaneous expense).
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Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Read more about the author.