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Article Series: Accounting
Home & Small Business Accounting
Bank
Reconciliation for Your Business
As your company keeps track
of its checking account balance, each month it receives a
statement from the
bank. The company needs to make sure that it has recorded everything
properly, and it is a good idea to make sure that the bank
has recorded everything properly as well (ask your friends
- it will be hard to find someone who hasn't been the victim
of a bank error). The mechanism for checking the general
ledger balance (the "book balance") against the bank statement
balance (the "bank balance") is the bank reconciliation.
It is unusual for the book balance to match the bank balance.
For example, if you mailed a check on the last day of the month,
you would have reduced your checking account balance, but the
check would not have made it to your bank yet, and therefore
it would not have been subtracted from the bank balance on
the bank statement just received. This is an example of an
outstanding check, which is a check that the company has written
and subtracted from its balance but that has not yet been recorded
by the bank. If you take a deposit to the bank on the last
day of the month, it is possible that the bank will not show
it as a deposit until the first day of the next month. However,
the company will include the deposit as part of its checking
account balance on the last day of the month. This is an example
of a deposit in transit, which is a deposit that the company
includes as part of its cash balance but that the bank has
not yet included.
There may also be items that are part of the bank balance
that have not yet been recorded in the company's checking account.
Common examples of this are service charges, bank fees, interest
added to the account, and wire transfers (deposits), which
are common among companies that accept credit and debit cards.
There are three ways to prepare the bank reconciliation:
- Take
the book balance and reconcile it to the bank balance.
- Take
the bank balance and reconcile it to the book balance.
- Take
the book balance and reconcile it to an adjusted cash
balance, then take the bank balance and reconcile
it to the
adjusted cash balance (the word reconcile means making
adjustments to arrive at another number).
Most
people prefer the third method, taking both the book and
bank balances and reconciling them to an adjusted cash
balance. When this method is used, any reconciling items needed
to get the book balance to the adjusted cash balance will require
the preparation of journal entries to adjust the book balance.
Any reconciling items needed to get the bank balance to the
adjusted cash balance will not require journal entries.
When the bank statement arrives, the first step is to note
which checks were returned with the statement. Most companies
go through their cash disbursements (a listing of all checks
sent, usually incorporating columns that detail the payee,
the date, the amount, and the check number) and put a mark
next to the checks that have come back with the bank statement.
Any check without a mark will be put on a list of outstanding
checks.
The
company will do the same thing with deposits: Any deposit
that does not have a mark indicating that it appears on the
bank statement will be put on a list of deposits in transit.
The company then goes through the bank statement and notes
any increases or decreases that the bank has made to the account
(aside from the items we already know about, such as the checks
we wrote or the deposits we made). Any of these items that
have not been put into the general ledger will be part of the
adjustments necessary to get the book balance to the adjusted
balance. # # # # # SolveYourProblem.com : 2007
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