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Lesson 10 of 13The Accounting Cycle: Merchandising Business
Unit 3 · Lesson 10 of 13

Bank Reconciliation

A business's Cash account and the bank's own records almost never agree on any given day — a reconciliation statement explains every difference and brings both records into agreement.

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Key things to remember

  1. 1Reconciliation Statement brings the bank's records into agreement with the depositor's (company's) records.
  2. 2Outstanding cheques and deposits in transit adjust the BANK side; they need no journal entry.
  3. 3NSF cheques and bank service charges adjust the BOOK side; they DO need a journal entry.
  4. 4Cancelled cheques are cheques the bank has already cashed, confirming they cleared.
  5. 5Both sides of the reconciliation must arrive at the exact same true (adjusted) cash balance.

A bank statement rarely matches the balance sitting in a company's own Cash account, and that mismatch is completely normal. Some transactions the company has already recorded simply have not reached the bank yet; some transactions the bank has already recorded have not yet reached the company's books. A Reconciliation Statement brings the bank's records into agreement with the depositor's records by identifying and explaining every one of those timing differences.

Items that affect the bank side

  • Outstanding Cheques are the cheques issued but not yet cashed — the company has already deducted them from its own Cash balance, but the bank has not yet processed them.
  • Deposits in transit — money the company has already recorded as deposited, but which the bank had not yet processed as of the statement date.
  • Cancelled Cheques are cheques that have been cashed by the bank — they appear on the bank statement and confirm a cheque has fully cleared.

Items that affect the book side

  • An NSF Cheque is one that cannot be paid because there are not sufficient funds in the account of the person who wrote the cheque — a customer's cheque the bank refused to honour, which must be removed from the company's Cash balance and, usually, added back to Accounts Receivable.
  • Bank service charges — fees the bank deducts directly from the account that the company has not yet recorded.
  • Amounts the bank collected on the company's behalf (like a note receivable and its interest), which the company has not yet recorded.
Bank Statement BalanceBalance per bank5 000+ Deposits in transit600- Outstanding cheques(400)Adjusted balance5 200Book BalanceBalance per books5 150+ Credit memo / interest120- NSF cheque(50)- Service charges(20)Adjusted balance5 200both sides meet: 5 200
Fig 1Two starting balances, adjusted independently, meeting at the same true cash figure
Only the BOOK side needs journal entries
Outstanding cheques and deposits in transit are already correctly recorded in the company's own books — they will simply clear the bank in the next period on their own, with no journal entry required. Only the items that were new information TO THE COMPANY (NSF cheques, bank charges, amounts the bank collected) need adjusting journal entries, because the books did not know about them until the statement arrived.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
Prepare a bank reconciliation. Bank statement balance: $12,340. Deposit in transit: $940. Outstanding cheques: No. 234 $525, No. 239 $755. Book (Cash account) balance: $11,215. The bank collected a note receivable of $850 plus $50 interest on the company's behalf. An NSF cheque from customer J. Lee for $80 was returned by the bank. Bank service charges were $35.
Example 2
Using the reconciliation above, journalize the entries needed to bring the Cash account up to its adjusted balance.

Where marks get lost

  • Journalizing outstanding cheques or deposits in transit — these are already correctly recorded in the books and need NO entry; they will simply clear on their own next period.
  • Adding an NSF cheque to Cash instead of subtracting it — an NSF cheque means the money never actually arrived, so it must come OUT of Cash.
  • Forgetting to reinstate Accounts Receivable when an NSF cheque bounces — the customer still owes the money.
  • Mixing up which items adjust the bank side versus the book side, and applying an item to the wrong column entirely.
  • Stopping once both sides don't match, instead of tracing every individual difference until both adjusted totals agree exactly.

Flashcards 6

Reconciliation Statement
Outstanding Cheques
Cancelled Cheques
NSF Cheque
+ 2 more

Practice

1
An outstanding cheque should be:
2
An NSF cheque from a customer should be:
3
Bank statement balance $8,900; deposit in transit $650; outstanding cheques totalling $1,120. Find the adjusted bank balance.
$
4
Book (Cash account) balance $7,960; bank service charges $40; NSF cheque $310; a note collected by the bank $600 (no interest). Find the adjusted book balance.
$
5
Which two items are subtracted from the bank statement balance during reconciliation?
6
Which item requires a journal entry on the company's own books?
7
What is a cancelled cheque?

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