What is Bank Reconciliation?
Bank reconciliation is the process of comparing a company's cash records to its bank statement and explaining any differences between them. It catches timing differences, bank fees, and errors so the true cash balance is known.
Bank reconciliation adjusts both the bank statement balance and the book (ledger) balance for timing differences and errors until the two adjusted balances match — that matched figure is the company's true cash balance.
- 1↓Compare balancesStart with the bank statement balance and the book (ledger) cash balance
- 2↓Adjust the bank sideAdd deposits in transit; subtract outstanding checks; fix bank errors
- 3↓Adjust the book sideAdd interest earned; subtract bank fees and NSF checks; fix book errors
- 4↓Compare adjusted balancesThe adjusted bank balance and adjusted book balance should now be equal
- 5Record journal entriesPost entries for the items that only appeared on the bank statement (fees, interest, NSF)
Try it: interactive calculator
Step-by-step worked examples
A company's book balance is $5,000. The bank statement shows $15 interest earned and $25 in bank fees, with no NSF checks. What is the adjusted book balance?
Adjusted book balance = Book balance + Interest − Fees = 5,000 + 15 − 25 = $4,990
The book balance is $8,200. The bank charged a $150 NSF check fee and $30 in service charges; interest earned was $10. What is the adjusted book balance?
Adjusted book balance = 8,200 + 10 − 30 − 150 = $8,030
The bank statement balance is $12,000. There are $2,000 of deposits in transit and $1,500 of checks still outstanding. What is the adjusted bank balance?
Adjusted bank balance = Bank balance + Deposits in transit − Outstanding checks = 12,000 + 2,000 − 1,500 = $12,500
Flashcards
Quick quiz
Q1.Which item is added to the BANK statement balance during reconciliation?
Q2.A company's book balance is $6,000, with $20 interest earned and $40 in bank fees. What is the adjusted book balance?
Q3.What is an outstanding check?
Q4.After reconciliation, the adjusted bank balance and adjusted book balance should:
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Common mistakes
Adding bank fees to the book balance. — Correct: Bank fees are subtracted from the book balance — they reduce cash, not increase it.
Adding outstanding checks to the bank balance. — Correct: Outstanding checks are subtracted from the bank balance because the cash hasn't left the bank yet from its perspective.
Ignoring NSF checks in the reconciliation. — Correct: NSF (bounced) checks must be subtracted from the book balance since the expected cash never arrived.
Assuming the bank statement balance is always the 'true' balance. — Correct: Neither balance is automatically correct — both must be adjusted for timing differences and errors to find the true cash balance.
FAQ
What is bank reconciliation?
It's the process of comparing and adjusting a company's book cash balance and bank statement balance until they match, explaining any differences.
What is the bank reconciliation formula?
Adjusted Book Balance = Book Balance + Interest Earned − Bank Fees − NSF Checks ± Errors; Adjusted Bank Balance = Bank Balance + Deposits in Transit − Outstanding Checks ± Errors.
How do you calculate the adjusted book balance in a bank reconciliation?
Start with the book balance, add interest earned, then subtract bank fees, NSF checks, and correct any book errors.
What are common bank reconciliation examples?
Adjusting for deposits in transit, outstanding checks, bank service fees, interest earned, and NSF (bounced) checks.