What Is Bank Reconciliation?

The word “reconciliation” means to make two sets of amounts correspond with each other

(i.e. make them equal to each other) by explaining why the two sets of amounts differ.

Bank reconciliation is the process of matching and comparing figures from accounting

records against those presented on a bank statement. Less any items which have no

relation to the bank statement, the balance of the accounting ledger should reconcile

(match) to the balance of the bank statement.

Bank reconciliation allows companies or individuals to compare their account records to

the bank's records of their account balance in order to uncover any possible discrepancies.

Since there are timing differences between when data is entered in the banks systems and

when data is entered in the individual's system, there is sometimes a normal discrepancy

between account balances. The goal of reconciliation is to determine if the discrepancy is

due to error rather than timing.

A bank reconciliation statement is a statement which indicates on a specific date why there

is a difference between the bank account balance in the general ledger and the current

account balance on the bank statement. Entries that appear on the bank statement, but are

not recorded in the cash receipts journal or cash payments journal, are recorded in the

relevant journal. The journals are therefore adjusted by the missing entries. Items recorded

in the cash receipts journal or cash payments journal, but not appearing on the bank

statement, are recorded in the bank reconciliation statement.

K.M. Khairul Hasan Arif

MBA, CMA ( Cont.)Bank Reconciliation

CAUSES OF DIFFERENCE:

Differences between the cash book and the bank statement can arise from:

• Timing of the recording of the transactions

• Errors made by the business, or by the bank

Also we can explain another way that the causes that lead to the disagreement of the balances in the cash book and the Pass book can be classified as follows:

Transactions that usually appear in the cash book, but not in the pass book. Transactions that usually appear in the pass book, but not in the cash book.

Let us, now discuss in detail the nature of these transactions and show how they cause the difference in the balances of these two books.

Transactions that Usually Appear in the Cash Book, but not in the Pass Book:

When you compare the cash book entries with their corresponding entries in the pass book, you will find a number of transactions which appear in the cash book but not in the pass book. Such transactions have been discussed below.

a) Cheques deposited into bank but not yet collected: When a payment is received by cheque, the firm sends it to the bank for collection and records it immediately on the debit side of the cash book. This increases the bank balance as per cash book. But the bank will not credit the firm's account till the cheque is actually collected. So, the balance in the pass book remains unaffected till the proceeds of the cheque are collected and credited. Thus, on a particular date, it is possible that certain cheques which were sent for collection might not have been collected by the bank and so not shown in the pass book. All such cheques pending collection would make the cash book balance different from the pass book balance. For example, the firm sends a cheque of Rs. 2,000 on December 28, to the bank for collection. The cheque is collected on January 6. Now, if the balances as on December 31 are compared, they will be different because the credit of Rs. 2,000 will not appear in the pass book by December 31.

b) Cheques issued but not yet presented for payment: Whenever a payment is made by cheque, the cash book is immediately credited. This reduces the balance in the cash book. But, it would always take some time before those cheques are actually presented for payment. The bank would debit the firm's account only when it actually pays the cheques. Hence, on a particular date, if there are some cheques still to be presented for payment, the pass book will not show their entries.

Consequently, the balance in the pass book will be higher than the balance as per cash book on that date.

c) Cheques dishonored but no entry made in the cash book: When cheques are sent to the bank for collection, they are entered in the cash book immediately. But, no entry appears in the pass book till such cheques are actually collected by the bank. Sometimes, for one reason or the other, the cheques deposited for collection get dishonored. The bank returns such cheques to the firm. On receiving the dishonored cheques from the bank, a reverse entry must be passed in the cash book. But, quite often, the firm fails to pass an entry for the dishonor of the cheque, or does so much later. In such a situation, the cash book will be showing a higher balance because no corresponding entry will appear in the pass book.

d) Errors in the cash book: It is quite possible that while recording transactions in the cash book some errors have been committed. These errors can be a source of a disagreement between the balances in the two books. Examples of such errors are:

i) A transaction, whether on the debit side or on the credit side, recorded more than once.

ii) A transaction to be recorded on the debit side has been wrongly recorded on the credit side, or vice versa.

iii) Sometimes the firm maintains more than one bank account. It is possible that a cheque issued on one account has been wrongly recorded to the debit of another account. This would affect both the bank accounts.

iv) Errors committed in balancing the cash book, or carrying forward the balance to another page.

Transactions that Usually Appear in the Pass Book, but not in the Cash Book:

There are many transactions which are initially recorded by the bank in its ledger. The firm records them in the cash book only when it receives the intimation from the bank or when it notices them while going through the pass book. Thus, it is possible when the pass book and the cash book are compared upto a particular date, there may be some entries which appear in the pass book but not in the cash book. Such transactions have been discussed below.

a) Interest allowed by the bank, if any: The banks normally do not allow any interest on the current account balances. Some banks may however allow nominal interest. When interest is allowed, the bank credits it to the customer's account. This increases the balance in the pass book. The firm would pass the corresponding entry

in the cash book only when it receives the intimation from the bank or notices it in the pass book. Hence, the cash book balance will be lower till such entry is made.

b) Amounts collected by the bank as per the standing instructions: The businessman often issues standing instructions authorizing his banker to collect on his behalf certain amounts due to him, such as interest, dividends, etc. The bank credits the customer's account as and when it collects such\ amounts and sends the necessary intimation to him. The firm will pass the\ corresponding entry in the cash book when it receives such intimation. Sometimes the intimation may be misplaced and no entry is passed in cash book. Thus, as on the date of reconciliation, the balances as per the cash book will be lower than the balance as per the pass book.

c) Direct payments into the bank made by firm's customers: Sometimes, a customer may directly deposit an amount into a firm's bank account. Firm shall record it in the cash book only when it learns about such deposit. But the pass book would show the entry on the date of deposit itself. If by the date of reconciliation, such entry has not been passed in the cash book, the balance shown by pass book will be higher than the balance as per cash book.

d) Bank charges: The banks usually charge their customers for various service provided by them. They may charge for collection of outstation cheques, for making or collecting payments on standing instructions, and so on. The bank debits the customer's account for such charges from time to time. However, the firm will know about these charges only when it goes through the pass book. So, on the date of reconciliation the pass book balance may differ from the balance as per cash book.

e) Interest on overdraft: When a firm avails of an overdraft facility, the bank charges some interest which it debits to the firm's account periodically. This would reduce the balance or add to the overdraft depending upon the nature of balance in the bank. However, the corresponding entry for interest on overdraft would be passed in the cash book only when the pass book is received. So, there may be a disagreement of the two balances on the date of reconciliation.

f) Payments made by the bank as per the standing instructions: The businessman issues standing instructions to his banker to make certain payments on his behalf such as insurance premium, rent, etc. When the banker makes such payments, he would immediately debit the customer's account. So, the balance in the pass book would get reduced. If the corresponding entries for such payments have not been recorded in the cash book, the balance as per cash book would remain unchanged.

g) Discounted cheques/bills receivable dishonored subsequently: Sometimes, when the businessman deposits some outstation cheques and wants payment immediately, he may request the bank to credit his account immediately without waiting for the actual collection. The bank usually obliges him by discounting the cheque. This means the bank deducts certain amount towards interest (called discount) and credits the remaining amount to his account. Subsequently, if for some reason, such a cheque is dishonored, the bank would immediately debit the firm's account. But, the firm would pass the entry for the dishonor only when it receives the intimation from the bank. Thus, the balance as per cash book would differ from the balance as per pass book till such entry has been passed. The same thing may happen when a discounted bill receivable is dishonored.

h) Errors in the pass book: The bank may also commit errors while recording the transactions in customer’s accounts which may lead to disagreement of the two balances. Examples of such errors are:

i) Omitting to record certain transactions in customer's account.

ii) Recording of a transaction on the wrong side of firm's account.

iii) Recording of a transaction in the wrong account where the firm has more than

one account in the bank.

iv) Recording of transactions which belong to some other customer in the firm's account.

Preparation of Bank Reconciliation Statement:

After identifying the causes of difference, the reconciliation may be done in the following two ways:

(a) Preparation of bank reconciliation statement without adjusting cash book balance.

(b) Preparation of bank reconciliation statement after adjusting cash book balance.

(a) Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance:

To prepare bank reconciliation statement, under this approach, the balance as per cash book or as per passbook is the starting item. The debit balance as per the cash book means the balance of deposits held at the bank. Such a balance will be a credit balance as per the passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals. It indicates the favourable balance as per cash book or favourable balance as per the passbook . On the other hand, the credit balance as per the cash book indicates bank overdraft . In other words, the excess amount withdrawn over the amount deposited in the bank. It is also known as unfavourable balance as per cash book or unfavourable balance as per passbook.

We may have four different situations while preparing the bank reconciliation statement. These are:

1. When debit balance (favourable balance) as per cash book is given and the balance as

per passbook is to be ascertained.

2. When credit balance (favourable balance) as per passbook is given and the balance as

per cash book is to be ascertained.

3. When credit balance as per cash book (unfavourable balance/overdraft balance) is given

and the balance as per passbook is to ascertained.

4. When debit balance as per passbook (unfavourable balance/overdraft balance) is given

and the cash book balance as per is to ascertained.

Dealing with favourable balances

Dealing with overdrafts

PROCEDURE FOR ASCERTAINING THE CAUSESOF DIFFERENCE AND EFFECTS THEREOF

When you find a difference between the balance shown by the pass book and the balance as per the cash book, take the following steps to identify the causes of the difference:

i) Compare the items appearing on the debit side of the cash book with those on the credit side of the pass book (deposits column), and place a tick mark against items appearing in both the books.

ii) Compare the items appearing on the credit side of the cash book with those on the debit side of the pass book (withdrawals column), and place a tick mark against items appearing in both the books.

In the process, you will observe that some items remained unticked. This means they do not appear in both the books. These will now be considered as those responsible for the difference in the balances of the two books. Look at Illustration 1. It shows the cash book with the complete entries. Tick mark has been placed against each item appearing in both the books. Then the causes of difference have been analyzed.

Solution:

On comparing the cash book with the pass book, it is observed that the balance as per cash

book is Rs. 13,000, while the balance as per pass book is Rs. 26,470. After making an entry

wise comparison and placing a tick mark on all items appearing in both the books, we find

the following:

i) There is an unticked item of Rs. 3,000 on 0ctober-29 on the debit side of the cash book. It

relates to a cheque received from Mr. Gupta which was deposited in the bank for

collection. This does not appear in the deposits column of the pass book. It means the

cheque had not been collected by October 3 1, and so not entered into the pass book.

ii) In the deposits column of the pass book, there is an unticked item of Rs. 1,000 on

October 31 for interest on securities collected by the bank as per standing instructions. This

does not appear on the debit side of the cash book.

iii) There is an unticked item of Rs. 16,000 on October 28, on the credit side of the cash

book. It relates to a cheque issued in favour of Mr. Misra. This does not appear in the debit

column of the pass book.

iv) In the debit column of the pass book there are two unticked items on October 30:(1)

payment of insurance premium by the bank as per standing instructions, Rs. 500, and (2)

bank charges debited by the bank, Rs. 30. But there are no corresponding entries on the

credit side of the cash book for these two items. Each of the above items appear only in one

book i.e., either in the cash book or in the pass book. As such, these are the items which are

responsible for the difference in the balances of the two books as on October 31.1987.

(b) Preparation of bank reconciliation statement after adjusting cash book balance:

When we look at the various items that normally cause the difference between the

passbook balance and the cash book balance, we find a number of items, which appear only

in the passbook. Why not first record such items in the cash book to work out the adjusted

balance (also known as amended balance) of the cash book and then prepare the bank

reconciliation statement. This shall reduce the number of items responsible for the

difference and have the correct figure of balance at bank in the balance sheet. In fact, this is

exactly what is done in practice whereby only those items which cause the difference on

account of the time gap in recording appear in bank reconciliation statement. These are as

(i) cheques issued but not yet presented, (ii) cheques deposited but not yet collected, and

(iii) due to an error in the passbook.

Step 1. Adjusting the Balance per Bank

We will demonstrate the bank reconciliation process in several steps. The first step is to adjust the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary for this step are listed in the following schedule:

Step 1. Balance per Bank Statement on Aug. 31, 2010

Adjustments:

Add: Deposits in transit

Deduct: Outstanding checks

Add or Deduct: Bank errors

Adjusted/Corrected Balance per Bank

Deposits in transit are amounts already received and recorded by the company, but are not yet recorded by the bank. For example, a retail store deposits its cash receipts of August 31 into the bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit.

Because deposits in transit are already included in the company's Cash account, there is no need to adjust the company's records. However, deposits in transit are not yet on the bank statement. Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in order to report the true amount of cash.

A helpful rule of thumb is "put it where it isn't." A deposit in transit is on the company's books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the balance on the bank statement.

Outstanding checks are checks that have been written and recorded in the company's Cash account, but have not yet cleared the bank account. Checks written during the last few days of the month plus a few older checks are likely to be among the outstanding checks.

Because all checks that have been written are immediately recorded in the company's Cash account, there is no need to adjust the company's records for the outstanding checks. However, the outstanding checks have not yet reached the bank and the bank statement.

Therefore, outstanding checks are listed on the bank reconciliation as a decrease in the balance per bank.

Recall the helpful tip "put it where it isn't." An outstanding check is on the company's books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the balance on the bank statement.

Bank errors are mistakes made by the bank. Bank errors could include the bank recording an incorrect amount, entering an amount that does not belong on a company's bank statement, or omitting an amount from a company's bank statement. The company should notify the bank of its errors. Depending on the error, the correction could increase or decrease the balance shown on the bank statement. (Since the company did not make the error, the company's records are not changed.)

Step 2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the company's Cash account so that it is the true, adjusted, or corrected balance. Examples of the items involved are shown in the following schedule:

Step 2. Balance per Books on Aug. 31, 2010

Adjustments:

Deduct: Bank service charges

Deduct: NSF checks & fees

Deduct: Check printing charges

Add: Interest earned

Add: Notes Receivable collected by bank

Add or Deduct: Errors in company's Cash account

Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's processing of the checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.) Other types of bank service charges include the fee charged when a company overdraws its checking account and the bank fee for processing a stop payment order on a company's check. The bank might deduct these charges or fees on the bank statement without notifying the company. When that occurs the company usually learns of the amounts only after receiving its bank statement.

Because the bank service charges have already been deducted on the bank statement, there is no adjustment to the balance per bank. However, the service charges will have to be entered as an adjustment to the company's books. The company's Cash account will need to be decreased by the amount of the service charges.

Recall the helpful tip "put it where it isn't." A bank service charge is already listed on the bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's books.

An NSF check is a check that was not honored by the bank of the person or company writing the check because that account did not have a sufficient balance. As a result, the check is returned without being honored or paid. (NSF is the acronym for not sufficient funds. Often the bank describes the returned checkas a return item. Others refer to the NSF check as a "rubber check" because the check "bounced" back from the bank on which it was written.) When the NSF check comes back to the bank in which it was deposited, the bank will decrease the checking account of the company that had deposited the check. The amount charged will be the amount of the check plus a bank fee.

Because the NSF check and the related bank fee have already been deducted on the bank statement, there is no need to adjust the balance per the bank. However, if the company has not yet decreased its Cash account balance for the returned check and the bank fee, the company must decrease the balance per books in order to reconcile.

Check printing charges occur when a company arranges for its bank to handle the reordering of its checks. The cost of the printed checks will automatically be deducted from the company's checking account.

Because the check printing charges have already been deducted on the bank statement, there is no adjustment to the balance per bank. However, the check printing charges need to be an adjustment on the company's books. They will be a deduction to the company's Cash account.

Recall the general rule, "put it where it isn't." A check printing charge is on the bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's books.

Interest earned will appear on the bank statement when a bank gives a company interest on its account balances. The amount is added to the checking account balance and is automatically on the bank statement. Hence there is no need to adjust the balance per the bank statement. However, the amount of interest earned will increase the balance in the company's Cash account on its books.

Recall "put it where it isn't." Interest received from the bank is on the bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's books.

Notes Receivable are assets of a company. When notes come due, the company might ask its bank to collect the notes receivable. For this service the bank will charge a fee. The bank will increase the company's checking account for the amount it collected (principal and interest) and will decrease the account by the collection fee it charges.Since these amounts are already on the bank statement, the company must be certain that the amounts appear on the company's books in its Cash account.

Recall the tip "put it where it isn't." The amounts collected by the bank and the bank's fees are on the bank statement, but they are not on the company's books. Put them where they aren't: as adjustments to the Cash account on the company's books.

Errors in the company's Cash account result from the company entering an incorrect amount, entering a transaction that does not belong in the account, or omitting a transaction that should be in the account. Since the company made these errors, the correction of the error will be either an increase or a decrease to the balance in the Cash account on the company's books.

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2), the two adjusted amounts should be equal. If they are not equal, you must

repeat the process until the balances are identical. The balances should be the true, correct amount of cash as of the date of the bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2). Adjustments to increase the cash balance will require a journal entry that debits Cash and credits another account. Adjustments to decrease the cash balance will require a credit to Cash and a debit to another account.

Real Sample

The following format is typical of one used in the reconciliation process. Note that the balance per the bank statement is reconciled to the "correct" amount of cash; likewise, the balance per company records is reconciled to the "correct" amount. These amounts must agree. Once the correct adjusted cash balance is satisfactorily calculated, journal entries must be prepared for all items identified in the reconciliation of the ending balance per company records to the correct cash balance. These entries serve to record the transactions and events which impact cash but have not been previously journalized (e.g., NSF checks, bank service charges, interest income, and so on).

COMPREHENSIVE ILLUSTRATION OF BANK RECONCILIATION:

The following illustration provides a detailed example of a bank statement, additional data, the reconciliation process, and the corresponding journal entries. Conducting a bank reconciliation requires careful attention to the slightest of details. Even the smallest error will lead to frustration in trying to bring closure to the reconciliation effort.

BANK STATEMENT

ADDITIONAL DATA

The above bank statement is for The Tackle Shop for July of 20X3.  The following additional data is needed to reconcile the account:

The first check listed above, #5454, was written in June but did not clear the bank until July 2.

There were no other outstanding checks, and no deposits in transit at the end of June.  The EFT (electronic funds transfer) on July 11 relates to the monthly utility bill; The Tackle

Shop has authorized the utility to draft their account directly each month. The Tackle Shop is optimistic that they will recover the full amount, including the service

charge, on the NSF check ("hot check") that was given to them by a customer during the month.

The bank collected a $5,000 note for The Tackle Shop, plus 9% interest ($5,450). The Tackle Shop's credit card clearing company remitted funds on July 25; the Tackle Shop

received an email notification of this posting and simultaneously journalized this cash receipt in the accounting records.

The Tackle Shop made the 2 deposits listed above, and an additional deposit of $3,565.93 late in the afternoon on July 31, 20X3.

The ending cash balance, per the company general ledger, was $47,535.30. The following check register is maintained by The Tackle Shop, and it corresponds to the

amounts within the Cash account in the general ledger:

BANK RECONCILIATION

The bank reconciliation for July is determined by reference to the above bank statement and other data. You must carefully study all of the above data to identify deposits in transit, outstanding checks, and so forth. Be advised that tracking down all of the reconciling items can be a rather tedious, sometimes frustrating, task. Modern bank statements facilitate this process by providing sorted lists with asterisks beside the check numbers that appear to have gaps in their sequence numbering. Below is the reconciliation of the balance per bank statement to the correct cash balance. You should try to identify each item in this reconciliation within the previously presented data.

Journal Entries required only for Cash Book.

Begins with the balance in the company's Cash account found in its general ledger. The bank reconciliation process includes listing the items that will adjust the Cash account balance to become the true cash balance. We will review each item appearing in Step 2 and the related journal entry that is required. Remember that any adjustment to the company's Cash account requires a journal entry. Generally, the adjustments to the books are the result of items found on the bank statement but have not yet been entered in the company's Cash account.

Item # Bank service charges. Since the bank deducted $35 from the company's checking account, but the company has not yet deducted this from its Cash account, the following journal entry needs to be made.

Date Account Name Debit Credit

August 31, 2010 Bank Service Charge Expense 35

Cash 35

(If the annual amount of service charges is small, debit Miscellaneous Expense.)

Item # NSF checks and fees. Since the bank deducted these legitimate amounts from the company's bank account, the company will need to deduct these amounts from its Cash account. As mentioned, the NSF check of $100 was from a customer. Therefore, the company will likely undo the reduction to Accounts Receivable that took place when the company originally processed the $100 check. If the company wishes to recover the bank fee of $10 from the customer, it should add the $10 fee to the amount that the customer owes the company. The journal entry might look like this:

Date Account Name Debit Credit

August 28, 2010 Accounts Receivable 110

Cash 110

(If the amount cannot be recovered from the customer, charge an expense.)

Item #Check printing charges. Because this expense is not yet entered on the company's books, but the amount has been deducted from its bank account, the company will make the following journal entry.

Date Account Name Debit Credit

August 20, 2010 Supplies 80

Cash 80

Item # Interest earned. The bank increased the checking account balance by $8 on August 31. Since the bank did not notify the company previously, the company must now increase the balance in its Cash account.

Date Account Name Debit Credit

August 31, 2010 Cash 8

Interest Revenue 8

Item # Notes receivable collected. The bank increased the company's checking account when it collected a note for the company on August 29. It was determined that the

company had not yet made an entry to its Cash account for this transaction. As a result the following journal entry is needed.

Date Account Name Debit Credit

August 29, 2010 Cash 960

Bank Service Charge Expense 40

Notes Receivable 1,000

Item #Company error. The company had entered $145 in its Cash account on August 29, but the bank statement showed the correct amount: $154. The transaction involved the cash sales for the day. As a result the company's Cash account will have to be increased by $9 as follows:

Date Account Name Debit Credit

August 29, 2010 Cash 9

Sales 9

We can do Bank Reconciliation Statement under two systems which are as below:

1. Single Balance 2. Double Balance

Single Balance :

Under this method we should start balance as per any book and figure out another balance as per other book. Sample as below:

According to Midu Sir

Balance as per Cash book ******

Add:

Less:

Balance as per Bank book ******

******

Balance as per Bank book ******

Add:

Less:

Balance as per Cash book *******

Cash to Bank to

Others rules:

If did not (+) that means did (-) --------- Do it (+)

If did not (-) that means did (+) ---------- Do it (-)

Double Balance :

Under this method we should find out only corrected balance of both book (Cash & Bank). Sample as below:

Rules Rules

Do same what Bank did. Do reverse what Bank did.

Balance as per Cash book ******

Add:

Less:

Corrected Balance ******

******

Balance as per Bank book ******

Add:

Less:

Corrected Balance ******

Cash Book Bank Book

Rules

Do what you should do.

If need (+) do (+)

If need (-) do (-)

Short Note How do I write-off old outstanding checks?

Years ago when a check appeared on the bank reconciliation’s list of outstanding checks for a lengthy period the answer was easy:

1. Void the check and add the amount to your checkbook balance.

2. Debit the general ledger Cash account for the amount, and credit the account that was originally debited.

3. Remove the check from the bank reconciliation’s list of outstanding checks.

Today, the answer is different for U.S. companies as states are now likely to have unclaimed property laws. For example, in my state a check issued to a vendor, but has not cleared the bank on which it is drawn, must be reported to the state after five years. In other words, you will now have to report a liability until the amount is remitted to your state.

Since you wrote the check and intended for it to be paid from the money in your checking, why not contact the payee as soon as the check is outstanding for 30 days? You may learn that the payee did not receive the check, had misplaced it, etc. Why not help your vendor the way you would want to be helped by your customers?

Do what you should do.

If need (+) do (+)

If need (-) do (-)

In short, communicate with the payees of your outstanding checks and eliminate the need for reporting and remitting to your state government many years after the original transactions.

How do you balance a checkbook?

You balance a checkbook by comparing the amounts on your bank statement or in your bank account to the amounts you have in your checkbook or check register. Accountants refer to this as reconciling the bank statement or doing a bank reconciliation or bank rec (pronounced as “wreck”).

You can find a free explanation and a complete illustration of how to balance your checkbook at Bank Reconciliation.

What is an unpresented check?

An unpresented check is a check written by a company and entered in its records, but the check has not yet cleared the company’s checking account. In other words, the check has not yet been paid by the bank on which the check is drawn. An unpresented check is also known as an outstanding check.

An unpresented check is listed on a bank reconciliation as a subtraction from the bank balance.

What is a voided check?

A voided check is a check written or partially written but then canceled or deleted by the maker of the check.

The notation of “void” is used because checks are prenumbered for control purposes and every check needs to be accounted for.

Voided checks may require some adjustments when reconciling the bank statement. For example, if a check is written in December but is voided in January, the Cash account in the company’s general ledger will need to be increased when the check is voided. (Another account will need to be credited because of double entry bookkeeping.)

How do you treat voided checks on the bank reconciliation?

If a voided check was written in a previous month, remove the voided check from the list of outstanding checks and write a journal entry to debit Cash and credit the account(s) that was debited when the check was originally recorded. This entry restores the cash into the checking account and eliminates the debit entered at the time the check was recorded. If the check was written in the current month, you can simply write the journal entry I just described.

Some software will allow a person to go into a previous period’s activity (as well as the current period’s activity) and remove the voided check or to change the amount to zero. This too will increase the cash balance and will remove the debit from the account originally debited when the check was recorded.

What is not sufficient funds?

Not sufficient funds or NSF is the term used to describe a check that has been returned by the bank on which it was drawn because the checking account balance was less than the amount of the check.

A check noted as not sufficient funds, NSF, or insufficient funds is also referred to as a returned check, a return item, a check that bounced, or as a rubber check since it was bounced back to the payee by the bank on which the check was drawn.

Checks returned as not sufficient funds usually result in bank charges for both the payee and for the person writing the check.

A check returned as not sufficient funds could be an indication that the financial condition of the maker of the check had declined. This could signal a potential credit loss if the maker of the check is a customer to which you extend credit terms on its purchases.

Is a postdated check considered to be currency?

A postdated check—a check with a date that is later than the current date—is not considered to be currency. Further, the postdated check should not be reported as part of the Cash account balance until the date of the check.

If the postdated check was received as payment on accounts receivable, the accounts receivable balance is not reduced until the date of the check.

To illustrate this, let’s assume that on August 20 a company receives a $1,000 postdated check. The check is dated September 5 and represents the full payment on one of the company’s accounts receivable. Since the postdated check is not considered to be money

until the date of the check, the accounts receivable should not be reduced and cash should not be increased until September 5. Therefore, the company’s August 31 balance sheet will report that the customer’s $1,000 accounts receivable is still due.

Are undeposited checks reported as cash?

Undeposited checks that are not postdated (not dated with a future date) are reported as cash. Accountants define cash as more than just currency and coins. For example, unrestricted checking accounts are also reported as cash.

How do you record a check that clears the bank months after it was voided?

Since you had voided the check months earlier, your general ledger no longer reflects 1) the original credit to the cash account, and 2) the original debit to another account. Now that the voided check has cleared the bank account, you will need to record the check in your general ledger. The entry will be a credit to the general ledger cash account and a debit (or debits) to the appropriate account.

It might be helpful to recall the bank reconciliation rule: Put it where it isn’t. The old check, which you had voided, is now on the bank statement, but it is not in the cash account. Therefore, you need to put the check amount into the general ledger.

In a bank reconciliation, what happens to the outstanding checks of the previous month?

The outstanding checks of the previous month will have either cleared the bank in the current month or will remain on the list of outstanding checks.

If an outstanding check of the previous month clears the bank (is paid by the bank) in the current month, you simply remove that check from the list of outstanding checks.

If an outstanding check of the previous month does not clear the bank in the current month, the check will remain on the list of outstanding checks until the month that it does clear the bank. In the bank reconciliation process, the total amount of the outstanding checks is deducted from the balance appearing on the bank statement.

What adjustment is needed when a check that was written in a previous month appears on the current month’s bank statement?

A check written in any previous month but not appearing on previous bank statements, should have been included in last month’s list of outstanding checks. Now that the check appears on the current month’s bank statement, the check should not be included in the current month’s list of outstanding checks. No other action is needed.

The general ledger account has always been correct, because the amount of the check reduced the general ledger account balance at the time the check was written and recorded.

The problem was the previous bank statements. The bank statement balances were too high since the check had not yet cleared the bank checking account. That’s why we subtract the amount of the outstanding checks from the bank statement balance. Now that the bank statement balance has been reduced by the check clearing the bank account, there is no longer a need to further subtract the amount of the check as outstanding.

Is an entry made for outstanding checks when preparing a bank reconciliation?

No entry is made to a company’s general ledger for outstanding checks when preparing a bank reconciliation. The reason is outstanding checks are an adjustment to the bank balance. Outstanding checks are not an adjustment to the company’s Cash account in its general ledger.

However, if a company voids one of its outstanding checks, the company will need to make an entry to its general ledger. The entry will debit Cash in order to increase the account balance. The credit portion of the entry will likely be to the account that was originally debited when the check was issued.

Which items on a bank reconciliation will require a journal entry?

The items on the bank reconciliation that will require a journal entry are the items noted as “adjustments to books.” These items did appear on the bank statement, but they did not appear on the company’s books.

A common example of a bank reconciliation item that will require a journal entry is the bank service charge. The bank service charge is often shown on the last day of the bank statement. Since it is on the bank statement, but not yet on the company’s books, you will need to credit Cash and to debit an expense such as Bank Charges or Miscellaneous Expense.

Other examples of items that are on the bank statement, but not yet on the books include check printing charges, fees for returned checks, correction by the bank for errors in the company’s deposits, collections made by the bank of the company’s notes receivable,

interest earned on bank accounts, miscellaneous bank fees, loan payments and other automatic withdrawals from the bank account.

If the bank made an error on the bank statement, you need to notify the bank so that the bank can make a correcting entry.

What does debit memo mean on a bank statement?

A debit memo on a bank statement refers to a deduction from the bank account’s balance. In other words, a debit memo has the same effect as a check written on the bank account.

A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee owed for the printing of checks, a fee for the handling of a check that was returned because of insufficient funds, a transfer of funds from the bank account to another account at the bank, and so on.

The charge, decrease, or reduction is likely called a debit memo because the checking account balance is a liability on the bank’s books. This is the case because the bank has your money as one of its assets and it has your account balance as one of its liabilities. When the bank decreases your account balance, it is reducing its liability. Liabilities are reduced with a debit entry. That also explains why the bank credits your account when your account balance is increased.

Can you help me to understand credit memo and debit memo in the bank reconciliation?

A bank credit memo is an item on a company’s bank statement that increases a company’s checking account balance. A bank debit memo is an item on the bank statement that reduces the company’s checking account balance. Since these items are already on the bank statement, the only adjustment that could be required is in the company’s accounting records. The old rule for the bank reconciliation “Put it where it isn’t” means that the bank’s credit memo amount must be added to the company’s accounting records, if it is not yet in the company’s accounts. Since the bank credit memo increased the checking account balance, the company’s Cash account will have to be debited and another account will need to be credited. For example, if the bank statement shows a credit memo for $100 for interest earned, the company will need to have a debit of $100 in its Cash account and will need a credit of $100 in Interest Revenue or Interest Income.

If the bank statement shows a debit memo of $25 for a service fee, the bank statement balance was decreased by $25. As part of the bank reconciliation process the following entry must be made if the item has not yet been recorded in the company’s records: debit Bank Fee Expense or Miscellaneous Expense $25 and credit Cash $25. The

company’s Cash account needs to be credited because this company’s asset account decreased.

The reason the bank used “debit” to decrease the company’s checking account is that its customers’ checking account balances are liabilities for the bank. (The bank’s cash was debited when customers deposited money and the bank’s liability account Demand Deposits or Checking Account Deposits was credited.) When the bank pays a customer’s check, the bank’s cash is reduced and the bank’s liabilities are reduced. The bank records this with a credit to Cash and a debit to Demand Deposits.

How do you record a return deposit item on a bank statement?

A deposited check that bounces (the deposited check is returned unpaid by the bank on which it is drawn) is deducted automatically on the depositor’s bank statement. The depositor needs to reduce its general ledger account Cash for the amount that was deducted on its bank statement. (In other words, the bank statement is correct and needs no adjustment. It is the depositor’s accounting records that do not reflect the returned check.) This means that the depositor needs to 1) credit Cash, and 2) debit the account that was credited when the depositor originally received the check.

Often the depositor’s bank will also charge a fee for handling the returned item. Since that fee is automatically deducted on the bank statement, the amount needs to be deducted from the depositor’s Cash account. The journal entry will be a credit to Cash and a debit to another account such as a receivable account.

A simple rule is that the adjustment must go where the item is not yet present. Since the return item and the related bank fee are already on the bank statement, the adjustment must go to the general ledger accounts.

Abbreviations on bank statements .include :-

Dep Deposit

Chq Cheque

C/C Cash & Cheques

D/D Direct deposit

P/P Periodic Payment

EFTPOS electronic funds transfer at point of sale

DSR Dishonored Cheque

BADT Bank Account Debits Tax

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