Always Know Your Cash – Reconcile Your Bank Statement
If you’ve ever had any kind of bank account for which you received periodic statements, you know that the balance you think you have doesn’t always match up exactly to the balance the bank thinks you have. In fact, as explained in before post, it would be pretty surprising if they did match exactly. That’s why you prepare bank reconciliations (a.k.a. bank recs) every month, to verify your cash balance.
Doing your bank rec manually is usually pretty simple; how long it takes depends largely on your transaction volume, with more transactions translating into more time-consuming bank recs. With accounting software, the process goes more quickly and is even easier to do. In fact, most programs contain dedicated software procedures strictly to deal with bank recs and to make them as painless as possible.
Timing differences come into play mainly with outstanding checks and deposits in transit, events you’ve recorded that haven’t made it into the bank records yet. As soon as you write a check, you record it in your check register; that can happen even before you put the check in an envelope, let alone before it clears the bank. For that reason, your checkbook balance may be lower than the statement balance. The same holds for deposits: you may record a deposit slip in your checkbook before you actually take it to the bank, giving you a higher balance than the bank says you have.
Once you account for all the entries you’ve recorded that haven’t made it into the formal bank records yet, you can turn your attention to items on the bank statement that haven’t made their way into your journal entries yet.
This can include things such as:
- Bank charges
- ATM transactions
- Check order fees
Anything that appears on the bank statement that you haven’t recorded yet ﬁts in this category.
When it comes to mistakes made by banks and businesses, most are really just variations on a common theme: mixing up the numbers. Trans- position errors top the list and are often the simplest to detect (they always result in a difference that’s divisible by nine). Transposition errors occur when two digits of a number are reversed, such as recording $127 as $172.
Another common mistake, one that’s much harder to ﬁnd, is simply picking up the wrong number; for example, check number 1230 on 4/16 for $360 is recorded for $416 by either your bank or your bookkeeper.
The Basic Format for a Bank Rec
If you’ve ever reconciled your personal checking account, you have some idea what a bank rec looks like. The standard format is the one you’ll see on the back page of your bank statement. This tried-and-true method is simple and straightforward, and no one has devised a better way to do it (except to do it by computer, which still uses the same format).
To get yourself set for this process, collect all your canceled checks and deposit slips for the period; these are your source documents. Put the checks in numerical order and the deposit slips in date order. Then compare your source documents to the bank statement to make sure they match.
A bank rec comes in two sections: bank to book, and book to bank. In the bank to book section, you’ll start with the bank statement balance. Add to that any deposits you’ve recorded that didn’t show up on the statement to get an updated balance. Then list and total all your outstanding checks, and subtract that total from the updated balance. If there are any errors on the bank statement, note them, and either add or subtract them from the latest total. (Remember to report these errors to the bank.) The new ﬁnal result is called the adjusted bank statement balance.
Next, your attention will shift to your cash balance, which you’ll pick up from the company checkbook. To that you will add any interest earned on the account that hasn’t yet been recorded, and subtract any new bank charges. If there are any errors on the book side, add or subtract them (as appropriate) to come up with a ﬁnal adjusted checkbook balance. That bot- tom-line balance has to equal your adjusted bank statement balance for your reconciliation to be complete.
Once you’ve ﬁnished the bank rec, you still have two more steps to take to ﬁnish the full process. First, make entries in the general journal for all the adjustments you had to make to the book balance in your reconciliation; then post those entries to the applicable general ledger accounts.