Bank Reconciliation – Crammer Nation

Put in simple terms...

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.

How to conduct bank reconciliation

Oftentimes, you’ll be given a prompt describing the situation revolving around a company & their bank. From there, you’ll need to pinpoint which phrases contribute to the company's side vs. the bank's side of reconciliation.

For example...

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.

After reading through a prompt like this one, we’ll transition to filling out a bank reconciliation template that looks like this:

Bank's Cash Balance

Per Bank Statement	???
???	???
???	???
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

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

What are we going to place in the empty rows? We'll place reconciling items that correspond to the bank vs. company... let's learn which items go into each!

Which items go on bank vs. company?

We only need to look out for 3 items with the bank's side:

Bank's Cash Balance Items

Reconciling Item	Add or Subtract?
Deposits outstanding	Add
Checks outstanding	Subtract
Bank error	Add / Subtract (it depends)

There's a few more items we need to concern ourselves with for the company side:

Company's Cash Balance Items

Reconciling Item	Add or Subtract?
Note collected	Add
Interest earned	Add
Service fees	Subtract
NSF check	Subtract
Electronic Funds Transfers (EFTs)	Subtract
Company error	Add / Subtract (it depends)

Preparing the reconciliation phrase-by-phrase

The best way to properly compile bank reconciliation is to go phrase-by-phrase!

Let's start with the first sentence!

Hats LLC is the company here, and they're saying that at the end of the month, they have a Cash balance of $800 (in their General Ledger).

Relating this to the bank reconciliation tables, this is the value for the "Per General Ledger" in the Company's Cash Balance!

Bank's Cash Balance

Per Bank Statement	???
???	???
???	???
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
???	???
???	???
???	???
Company Balance per Reconciliation	???

What we need to focus on here is that "they wrote $10,000 in checks, but $200 of those checks haven’t been processed by CashForDays bank".

Those $200 in checks are the definition of checks outstanding!

Checks outstanding are checks that the company has written that have yet to be recorded by the bank!

Remember, checks outstanding subtract from the Bank's Cash Balance...

Bank's Cash Balance Items

Reconciling Item	Add or Subtract?
Deposits outstanding	Add
Checks outstanding	Subtract
Bank error	Add / Subtract (it depends)

...so we'll place those $200 of checks outstanding on the Bank's Cash Balance side of our bank reconciliation like so:

Bank's Cash Balance

Per Bank Statement	???
Checks outstanding	($200)
???	???
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
???	???
???	???
???	???
Company Balance per Reconciliation	???

(It's in parentheses because it is a negative number subtracting away from the Bank's Cash Balance.)

What we need to focus on here is that "$170 out of their $20,000 in cash receipts still needs to be deposited in CashForDays Bank" yet. Those deposits are the definition of deposits outstanding!

Deposits outstanding are deposits that the company has received that have yet to be recorded by the bank!

Remember, deposits outstanding add to the Bank's Cash Balance...

Bank's Cash Balance Items

Reconciling Item	Add or Subtract?
Deposits outstanding	Add
Checks outstanding	Subtract
Bank error	Add / Subtract (it depends)

...so we'll place those $170 deposits outstanding on the Bank's Cash Balance side of our bank reconciliation like so:

Bank's Cash Balance

Per Bank Statement	???
Checks outstanding	($200)
Deposits outstanding	$170
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
???	???
???	???
???	???
Company Balance per Reconciliation	???

This is telling us that on the Bank's side, they have $850 recorded as Hats LLC's Cash balance.

Relating this to the bank reconciliation tables, this is the value for the "Per Bank Statement" in the Bank's Cash Balance!

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
???	???
???	???
???	???
Company Balance per Reconciliation	???

This is dealing with a note receivable collected by the bank on behalf of the company. The bank is letting the company know about it at the time of reconciliation, so this'll go on the Company's Cash Balance.

So... does this add or subtract from the company's or bank's side of bank reconciliation?

Company's Cash Balance Items

Reconciling Item	Add or Subtract?
Note collected	Add
Interest earned	Add
Service fees	Subtract
NSF check	Subtract
Electronic Funds Transfers (EFTs)	Subtract
Company error	Add / Subtract (it depends)

It adds to the Company's Cash Balance! Therefore, we'll place this $200 note here in the bank reconciliation:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note collected	$200
???	???
???	???
Company Balance per Reconciliation	???

This is dealing with interest earned by the company that the bank has recognized, but not yet alerted the company about. Therefore, it must go on the Company's Cash Balance side.

Does this add or subtract from the company's or bank's side of bank reconciliation?

Company's Cash Balance Items

Reconciling Item	Add or Subtract?
Note collected	Add
Interest earned	Add
Service fees	Subtract
NSF check	Subtract
Electronic Funds Transfers (EFTs)	Subtract
Company error	Add / Subtract (it depends)

It adds to the Company's Cash Balance! Therefore, we'll place those $20 of interest earned here in the bank reconciliation:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
???	???
Company Balance per Reconciliation	???

This is dealing with a service fee that the bank is charging the company for running their account, but has not yet been recorded by the company. Therefore, it must go on the Company's Cash Balance.

(Even though it says "bank service fee", it's actually the company who needs to add this to their reconciliation, because it's currently not in their books!)

Does this add or subtract from the company's or bank's side of bank reconciliation?

Company's Cash Balance Items

Reconciling Item	Add or Subtract?
Note collected	Add
Interest earned	Add
Service fees	Subtract
NSF check	Subtract
Electronic Funds Transfers (EFTs)	Subtract
Company error	Add / Subtract (it depends)

It subtracts from the Company's Cash Balance! Therefore, we'll place it in the company side like so:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
???	???
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
Company Balance per Reconciliation	???

(It's in parentheses because it is a negative number subtracting away from the Company's Cash Balance.)

This phrase is dealing with a mistake made by the bank in regards to their record of the company's cash balance. Therefore, it'll correspond to the Bank's Cash Balance.

Will it add or subtract from the company's or bank's side of bank reconciliation?

Bank's Cash Balance Items

Reconciling Item	Add or Subtract?
Deposits outstanding	Add
Checks outstanding	Subtract
Bank error	Add / Subtract (it depends)

It's TBD... to figure out whether it adds or subtracts, we're going to need to do some quick math.

First, let's determine whether or not we're dealing with a deposit or payment.

The bank wrote a $50 service fee under the company's cash balance... this is a payment.

Next, let's determine if the amount written was more or less than what it should've been.

In this case... the bank shouldn't have wrote anything under the company's cash balance. So $50 is more than what it should've been.

So... the bank wrote a payment for the company for more than what it should've been. Therefore, we need to add this bank error back to the cash balance!

Bank's Cash Balance Items

Reconciling Item	Add or Subtract?
Deposits outstanding	Add
Checks outstanding	Subtract
Bank error	Add / Subtract (it depends)

We'll do that like so under the Bank's Cash Balance:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
Company Balance per Reconciliation	???

To clear up any confusion surrounding "non-sufficient funds"...

Non-sufficient fund (NSF) checks are when the company gets paid with a check from a customer, and then when the bank goes to cash the check, the customer's account doesn't have the funds to pay the check amount!

The bank alerts the company of these NSF checks at the time of reconciliation. Therefore, they impact the Company's Cash Balance (since the company needs to get on the same page as the bank).

But, do they add or subtract form the Company's Cash Balance?

Company's Cash Balance Items

Reconciling Item	Add or Subtract?
Note collected	Add
Interest earned	Add
Service fees	Subtract
NSF check	Subtract
Electronic Funds Transfers (EFTs)	Subtract
Company error	Add / Subtract (it depends)

They subtract from the Company's Cash Balance!

We'll write that in our bank reconciliation like so:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	???

(It's in parentheses because it is a negative number subtracting away from the Company's Cash Balance.)

After going phrase-by-phrase, your bank reconciliation should look like so!

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	???

Ensure your Cash Balances match up!

The final step of bank reconciliation is ensuring that your ending Bank Cash Balance and ending Company Cash Balance match up!

For full clarity, these cash balances occur here:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	???

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	???

All we need to do from here is find the sum on the Bank's Cash Balance...

$850 (Per Bank Statement)
-$200 (Checks outstanding)
+$170 (Deposits outstanding)
+$50 (Bank error)
-----
=$870

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	???

...and then find the sum on the Company's Cash Balance...

$800 (Per General Ledger)
+$200 (Note receivable)
+$20 (Interest earned)
-$50 (Service fees)
-$100 (NSF checks)
-----
=$870

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

...and ensure they're the same value, which they are!

After summing each table, both your end Cash Balances should equal $870...

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

...which validates that we've conducted our bank reconciliation correctly, and haven't missed any reconciliation items needed to get the bank and company on the same page before they move into the next month!

Adjusting entries for reconciliation

Now that we've ran through the bank reconciliation, it's time to adjust the Hats LLC's Cash account balance from $800...

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

...to $870.

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

To do that, we’re going to translate these reconciliation items…

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

...into adjusting journal entries!

For full clarity, these are the reconciliation items that increase Cash:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

Let's start with "Note receivable" here:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50

Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

This reconciliation item is where a customer is paying the bank in cash for a note receivable they made with Hats LLC. Therefore, if the customer is paying off their note receivable balance, that means they're subtracting from the Notes Receivable account, which means we'll credit that account (since it's an asset and has a normal debit balance).

Transaction	Debit	Credit
???	???
Note Receivable		$200
???		???

Next, "Interest earned"!

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

This means that over the course of the month, we made $20 in interest revenue, which will be added to the Interest Revenue account. Being a revenue account, that means it has a normal credit balance. Therefore, to add to Interest Revenue, we'll credit it!

Transaction	Debit	Credit
???	???
Note Receivable		$200
Interest Revenue		$20

This is it for our reconciliation items that increase the Cash account balance, therefore we can wrap up this adjusting journal entry by debiting Cash by $220 (because $200 + $20 = $220)!

Transaction	Debit	Credit
Cash	$220
Note Receivable		$200
Interest Revenue		$20

The resulting adjusting entry increasing Cash will look like so:

Transaction	Debit	Credit
Cash	$220
Note Receivable		$200
Interest Revenue		$20

For full clarity, these are the reconciliation items that decrease Cash:

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50
Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

We'll start with "Service fees" here...

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50

Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

...which will be filed under the Service Fee Expense account.

Considering that we're increasing our Service Fee Expense here, we'll debit the account, since expenses have a normal debit balance.

Transaction	Debit	Credit
Service Fee Expense	$50
???	???
???		???

Next, "NSF checks"!

Bank's Cash Balance

Per Bank Statement	$850
Checks outstanding	($200)
Deposits outstanding	$170
Bank error	$50

Bank Balance per Reconciliation	$870

Company's Cash Balance

Per General Ledger	$800
Note receivable	$200
Interest earned	$20
Service fees	($50)
NSF checks	($100)
Company Balance per Reconciliation	$870

With this reconciliation item, Hats LLC is losing out on $100 cash from customer checks that ended up having non-sufficient funds.

We'll still be paid by the customer in the future, it's just that for now, we must take their $100 out of the Cash account.

To represent that we'll be paid in the future, we're going to place their $100 in the Accounts Receivable account (think about it: we'll be "receiving" that $100 sometime in the future once the customer figures out their non-sufficient funds!)

Transaction	Debit	Credit
Service Fee Expense	$50
Accounts Receivable	$100
???		???

This is it for our reconciliation items that decrease the Cash account balance, therefore we can wrap up this adjusting journal entry by crediting Cash by $150 (because $100 + $50 = $150)!

Transaction	Debit	Credit
Service Fee Expense	$50
Accounts Receivable	$100
Cash		$150

The resulting adjusting entry decreasing Cash will look like so:

Transaction	Debit	Credit
Service Fee Expense	$50
Accounts Receivable	$100
Cash		$150

How to conduct bank reconciliation

Which items go on bank vs. company?

Preparing the reconciliation phrase-by-phrase

Ensure your Cash Balances match up!

Adjusting entries for reconciliation

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