What is bank reconciliation?
Bank reconciliation is when the company and the bank ensure that their balances for the Cash account on either side match for the company.
Throughout a given period of time (typically a month), both the company and bank incur transactions that “get lost” in the mix. The purpose of this bank reconciliation is to realign on any transaction that may have been missed from either side.
Reconciliation Items: Bank vs. Company
It's important to have an understanding of which reconciliation items impact the Bank's Cash Balance vs. the Company's Cash Balance.
Bank's Cash Balance Items
| Reconciling Item | Description | Add or Subtract to Cash Balance? |
|---|---|---|
| Deposits outstanding | Deposits made by the company, not recorded by the bank yet. | Add |
| Checks outstanding | Checks written by the company, not recorded by the bank yet. | Subtract |
| Bank error | Bank accidentally charges (or forgets to charge) the company. | Add / Subtract (it depends) |
Company's Cash Balance Items
| Reconciling Item | Description | Add or Subtract to Cash Balance? |
|---|---|---|
| Note collected | Bank collects a note on behalf of the company. | Add |
| Interest earned | Bank collects interest on behalf of the company. | Add |
| Service fees | Bank charges company a service fee for bank services. | Subtract |
| NSF check | Company receives a check, but the account doesn't have sufficient funds to pay the check amount. | Subtract |
| Electronic Funds Transfers (EFTs) | Automatic withdrawals from the company's bank account (ex: rent). | Subtract |
| Company error | Company incorrectly records a transaction amount. | Add / Subtract (it depends) |
How to conduct bank reconciliation
You'll typically be given a prompt like the one below and asked to pinpoint which phrases contribute to the company's side vs. the bank's side of reconciliation.
Question: On April 31st, 2022, Hats LLC has a Cash balance of $800. Over the course of the month, they wrote $10,000 in checks, but $200 of those checks haven’t been processed by CashForDays bank. In addition, $170 out of their $20,000 in cash receipts still needs to be deposited in CashForDays Bank.
However, on their bank statement, it shows a Cash Balance of $850 and includes the following items not yet recorded by the company: a note receivable collected by the bank for $200, interest earned on that note of $20, and a bank service fee of $50. In addition, the bank accidentally charged Hats LLC $50 for a service fee that was meant to be on another customer’s account. Lastly, one of Hats LLC customer’s checks for $100 returned back with non-sufficient funds.
Prepare the bank reconciliation to correct the ending Cash Balance on April 31st, 2022.
Bank's Cash Balance
| Per Bank Statement | ??? |
| ??? | ??? |
| ??? | ??? |
| ??? | ??? |
| Bank Balance per Reconciliation | ??? |
Company's Cash Balance
| Per General Ledger | ??? |
| ??? | ??? |
| ??? | ??? |
| ??? | ??? |
| Company Balance per Reconciliation | ??? |