Bank Reconciliations

Bank Reconciliation Overview

Definition: Bank reconciliation is the process of matching and comparing figures from accounting records against those reported by a bank to ensure correctness and to safeguard cash.

Cash is a highly liquid asset and is susceptible to theft.
Safeguarding cash is crucial for business integrity.
The best method for protecting cash is by performing regular bank reconciliations.

Signature Card: A record of signatures authorized to access the bank account.
Deposit Ticket: A form used to deposit funds into the bank account.
Check: A written order directing a bank to pay a specified sum of money from the account.
Bank Statement: A summary of all transactions in the bank account for a specific period.
Bank Reconciliation Statement: A document that explains the reasons for differences between bank and record balances.

Maintain an up-to-date signature card.
A monthly bank reconciliation should be performed by an independent party to add credibility.
Use prenumbered checks for cash payments to track and prevent fraud.
Record cash receipts immediately and deposit them daily to avoid theft and discrepancies.

Reconciling items must be checked against:
- Balance per bank
- Balance per books
If items appear in one balance but not the other, adjustments are necessary to correct discrepancies.

Bank Side:
- Beginning Balance: Starting amount in the bank.
- Additions (e.g., deposits in transit, interest income, collections by bank, EFT): Items not yet accounted in the bank balance.
- Subtractions (e.g., outstanding checks, service charges, NSF checks, EFT payments): Items that decrease the bank balance.
Book Side:
- Beginning Balance: Starting amount in the company’s books.
- Additions (interest income, collections by bank, EFT): Money received that must be added to company records.
- Subtractions (service charges, NSF checks, charges for printed checks, EFT payments, book errors): Non-cash transactions affecting the record.
- Adjust both bank and book balances for errors.

Deposit in Transit: Recorded deposits not yet processed by the bank. It's a timing issue.
Outstanding Checks: Written checks not yet cashed.
Error Corrections: Analyze bank errors to determine adjustments (additions or subtractions).

Additions:
- Interest Income: Earnings from bank accounts.
- Collections by Bank: Payments made directly to the bank on behalf of a business.
- EFT Collections: Money electronically transferred into account.
Subtractions:
- Service Charges: Bank fees deducted from the account.
- NSF Checks: Checks returned due to insufficient funds.
- EFT Payments: Automatic payments reducing account balance.
- Book Errors: Corrections for misrecorded transactions.

Certain reconciling items require journal entries:
1. Bank collections of notes receivable.
2. Bank service charges.
3. Errors in cash accounts.
4. NSF checks.
Entries can only modify the book side, as the bank's side is outside company control.

Bank Side:
- Balance as of January 31: $575
- Add Deposit in transit: $1,775
- Subtract Outstanding checks: ($606)
- Adjusted Bank Balance: $1,744
Book Side:
- Balance as of January 31: $1,801
- Add EFT collection (rent): $330
- Subtract service charge, NSF checks, printed checks, and book error: ($387)
- Adjusted Book Balance: $1,744

Date: January 31
- Debit Cash $330, Credit Rent Revenue $330: EFT collection of rent.
- Debit Miscellaneous Expense $20, Credit Cash $20: Bank fees.
- Debit Accounts Receivable $115, Credit Cash $115: NSF check returned.
- Debit Salary Expense $252, Credit Cash $252: Correction for book error.