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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 ItemDescriptionAdd or Subtract to Cash Balance?
Deposits outstandingDeposits made by the company, not recorded by the bank yet.Add
Checks outstandingChecks written by the company, not recorded by the bank yet.Subtract
Bank errorBank accidentally charges (or forgets to charge) the company.Add / Subtract (it depends)

Company's Cash Balance Items

Reconciling ItemDescriptionAdd or Subtract to Cash Balance?
Note collectedBank collects a note on behalf of the company.Add
Interest earnedBank collects interest on behalf of the company.Add
Service feesBank charges company a service fee for bank services.Subtract
NSF checkCompany 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 errorCompany 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???
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Bank Balance per Reconciliation???

Company's Cash Balance

Per General Ledger???
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Company Balance per Reconciliation???