So, you want to learn
Bookkeeping!
Cash
by Bean Counter's Dave Marshall

Lesson 3
Bank Reconciliations


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter
Believe it or not, I've actually run across so called bookkeepers that could not prepare a bank reconciliation. Of course often the owner was not even aware that they weren't being done. Hopefully if you're a bookkeeper, manager, or owner this doesn't apply to you or you're taking this course to remedy the situation..

This task is not really difficult and really only requires applying some organization, logic, and common sense. Can you get by without doing them ? You probably could, but I sure don't recommend it ! Cash is a critical business asset and should be managed as such. Performing monthly bank reconciliations is just one of the tasks of properly managing cash.

What Is A Bank Reconciliation ?

A Bank Reconciliation is just a record that is normally prepared each month after you receive your bank statement from the bank for the month. The record compares what you recorded in your cash records with what was recorded by the bank in your bank statement and provides proof as to the accuracy of your cash balance.

What's The Terminology I need To Be Familiar With ?

  • "As Of" Date is the date you pick to reconcile your bank balance with your check book balance.
  • Cutoff Date is the date that the bank determines and uses to prepare your bank statement as of a specified date. All your banking transactions (deposits, checks, and other adjustments) that the bank has processed that have occurred prior to and including this date are included in your current monthly bank statement. All transactions that occur after this date are included in your next month's bank statement.
  • Check Book is a record that is used to keep up with the balance in your bank account and in which you record all your deposits, payments, and deductions that either increase or decrease your bank balance.
  • Bank Draft is a document that authorizes a deduction to be made from your checking account. A common example would be a draft that is taken out of your bank account each month for insurance.
  • Check is a document used to transfer funds from one business or individual to another business or individual. The check is made payable to the payee (individual or business receiving the funds) and is signed by the payer (individual or business paying the funds). The check is "drawn on" a bank or financial institution where the payer maintains their checking account and the funds are transferred from.
  • Deposit Slip is a document used to summarize and record checks and cash received that are deposited in the bank.
  • Deposit Book is a record that contains the blank and completed deposit slips used for preparing the individual daily deposit slips. Usually the slips are treated so that a "carbon" copy is provided. The original is used for making the deposit in the bank.
  • Bank Fees are fees that a bank charges for providing various services to their customers. A common example of a bank fee is the monthly statement charge.
  • Credit Card Fees are the fees that a business encounters in order to provide the capability for their customers to use their credit cards when making a purchase. The credit card service provider charges various fees to the merchant such as a monthly statement fee, processing fee for each transaction, and usually a percentage amount for each transaction processed.
  • Direct Deposits are deposits that are sent to and directly deposited in your bank. The bank usually sends a notice to their customers to alert them that the deposit has been made on their behalf. A common example that many businesses should be familiar with is the daily transmittal (deposit) of all their customer's credit card sales processed by their credit card provider.
  • Outstanding Checks are simply checks written by a business or individual that have not yet been processed and cleared by the bank. In other words, they are checks written that have not yet gotten to the bank.
  • Deposits In Transit are deposits made by a business or individual that have not yet been credited to your account by the bank. Usually, this results from making a deposit for a day late in the afternoon or evening. When referred to when preparing a bank reconciliation, the Deposits In Transit are the deposits that have been recorded in the business's records but have not yet been recorded in the bank's records.
  • NSF is an abbreviation for Non Sufficient Funds. This occurs when a check you receive and deposit in your bank account is later returned to you because the check was "no good". In other words, your customer or whoever wrote the check did not have enough money in their bank account to cover the amount that the check was written for.

What's Involved in Reconciling Your Bank Account ?

Selecting A Reconciliation "As Of" Date

You can actually reconcile your check book balance as of any date but the common practice is to reconcile your bank balance with your check book balance as of the end of the month. The date you select is called your "As Of" Date.

As we learned in the Introduction, a cutoff date as defined and used by a bank is the date that the bank determines and uses to prepare your bank statement as of a specified date. All your banking transactions (deposits, checks, and other adjustments) that the bank has processed that have occurred prior to and including this date are included in your current monthly bank statement. All transactions that occur after this date are included in your next month's bank statement.

Your bank's cutoff date has an affect on the number of checks that you'll have listed as Outstanding and the number of deposits that you'll have listed as Deposits In Transit. If you pick your Reconciliation "As Of" Date as the end of each month and your bank's Cutoff Date is the 15th of the month, you'll have 15 days worth of transactions for your month that the bank statement will not have listed on the statement. On the other hand, if the bank's cutoff date is a date close to the end of each month such as the 28th, there will be very few transactions that you have recorded in your check book for the month that are not also listed and included in the bank statement.

So what do you do ? One solution is to request your bank to provide your business with a cutoff date late in the month. Another possible solution would be to use the bank's cutoff date for the month as your Reconciliation "As Of" Date for the month. In other words, you would reconcile your bank balance and book balance as of the 15th of the month if the bank's cutoff date for the month was the 15th.

Why doesn't the bank have the same cutoff date for all its customers ? By having different cutoff dates, the bank is able to smooth out their work effort and manpower requirements. Instead of having to prepare and mail out all their customer statements at month end, they can stagger this task and mail some at the beginning, some in the middle, and others at the end.

Let's look at a chart to illustrate the effect of the Bank's Cutoff Date

Cut Off Date Effect How To Handle
Early In The Month Bank Statement will have some deposits and some checks listed that are not recorded in your check book for your current month (month you want to reconcile).These checks and deposits are recorded in your check book in the following month. Use Bank's Cutoff Date as your Reconciliation "As Of" Date

Or

Adjust the Bank's Statement Balance to the balance that would be shown if the Cut Off Date had been the End Of The Month. To do this all you need to do is identify and total the checks processed that are applicable to your next month and also identify and total any deposits that were processed that are applicable to your next month.

It's then a simple matter of mathematics to determine your bank statements balance adjusted as of the end of the month.

Bank Balance
Less: Deposits Posted Applicable To The Next Month
Plus: Checks Processed Applicable To The Next Month
Adjusted Bank Balance As Of The End Of The Month

Middle Of The Month Your Check Book for the month will have quite a few transactions (checks and deposits) that will not appear on the Bank Statement. These transactions will have to be included in your Outstanding Check List For The Month and your Deposits In Transit Listing For The Month. Use Bank's Cutoff Date as your Reconciliation "As Of" Date

Or

Include the checks not listed in your Outstanding Check List and the deposits not listed in your Deposits In Transit List. These will probably contain quite a few checks and deposits.

Or

As we discussed in the Early In The Month Section, adjust the Bank's Statement Balance to the balance that would be shown if the Cut Off Date had been the End Of The Month.

End Of The Month This is the situation you normally run across. Your Check Book for the month will have just a few transactions (checks and deposits) that will not appear on the Bank Statement. These transactions will have to be included in your Outstanding Check List For The Month and your Deposits In Transit Listing For The Month. No special actions or adjustments are required.

Don't get excited if you don't fully understand the prior section on Cut Off Dates and As Of Dates. Most businesses I've run across have late in the month bank cutoff dates and don't need to be concerned about making any adjustments or revising their As Of Dates (End Of Month). I only wanted you to be aware of the situation so that if you do run across it you'll at least be aware of it and can get some additional guidance if you need to.

All our examples and illustrations will assume a late in the month Bank Cutoff Date and an end of the month "As Of" Date.

Maintaining Accurate and Complete Records

In order to be able properly perform a bank reconciliation, a business needs to maintain a record of its deposits and receipts. This record may be a check book, check register, or a computer generated cash report listing the deposits, checks written, and the current balance of the checking account. If you recall, in Lesson 1 we discussed the various records used to record deposits and checks.

If an accurate and complete cash record is not maintained it turns the simple task of preparing a bank reconciliation into a hair pulling nightmare. Also if cash drawers are not balanced and reconciled daily, deposit tickets are not prepared for each days receipts, or deposits for different day's receipts are commingled, it further compounds the task of reconciling your bank account(s). I didn't say you still can't reconcile your bank account. It only makes the task more time consuming if good records are not maintained.

You should use your check book, check register, or input the information into your computer program promptly for all checks written, deposits received, or any other transaction that affect your cash balance. Don't forget to make entries for monthly bank maintenance fees, check printing charges, returned checks (customer bad checks), bank drafts for insurance or loan payments, or any other charges. On the flip side of the coin (deposits), be sure to make entries for credit card transactions and any related credit card processing fees that are automatically deposited in your checking account.

What records do you need to perform this task ?

  • Check Book, Check Register, or Computer Generated Cash Report for the month.
  • Deposit Book and Duplicate Deposit Slips
  • Daily Cash Reports
  • Cash Receipts Listing for the month
  • Cash Disbursements Listing the month
  • Prior Month's Bank Reconciliation
  • Bank Statement for the month including your actual canceled checks and any other notifications from the bank.
    Steps In Preparing A Bank Reconciliation
    1. Probably the first step that should be done is to review your check book for any omitted check numbers or deposits. In other words, double check that all your cash transactions have been recorded in your check book. Since your checks are numbered look for any missing numbers in your check book. Likewise, if you assign a number to your deposit tickets all you need to do is look for any missing numbers.

      You also need to check your additions and subtractions and your calculated balances to make sure that the check book balances have been accurately calculated. While performing your review of your check book also be on the lookout for any transactions that were accidentally recorded twice.

    2. If your bank returns your checks in your bank statement and the checks aren't already sorted in numerical order, you need to take the time to put your checks in numerical order. I hate to do this, but it makes it a lot easier if you need to later locate and review an actual check. You also need to review all the checks and make sure that all the checks have the proper signature.
    3. Using the section of your bank statement that lists the checks processed by the bank (usually listed in check number order) and your check book or register you need to compare the two records to see what checks have been recorded in your records and what checks have also been recorded by the bank. In addition, you need to make sure that the check number and amounts recorded on your bank statement and in your check book or register also agree. Note that the date of the check transaction on your bank statement may be the same date (rarely) as recorded in your check book or a few days or even weeks later depending on when your payee deposits his/her check in their bank account and when your check is finally processed by your bank.

      This is simply the process of putting a check mark (or any other symbol or notation you want to use) by the check number on the bank statement and also a check mark (or your symbol or notation) by the check number in your check book or register for all the transactions that appear in each record and that have the correct check numbers and amounts. For those transactions that appear in both records but have a different check number or amount place an ? (or any other symbol or notation you want to use) beside the transaction on the bank statement and also an ? (or your symbol or notation) in your check book or register.

      The transactions marked with a ? (or your symbol or notation) need to be investigated to determine what the correct check numbers and amounts are.

      What does the check mark (or your symbol or notation) in both the bank statement and check book mean ? All this means is that the cash transaction, in this case a check, has been accurately recorded in your check book and also recorded by the bank in your bank statement. The check mark (or your symbol or notation) in your check book or register also means that the check has been presented to your bank and paid (cleared).

      Since normally some checks that you write during a given month do not appear on your bank statement in the month written because they have not yet been "cashed", you may find the check that you need to mark in your Check Book listed in it in an earlier month. These type of checks are referred to as Outstanding Checks From a Prior Month. You use your previous month's bank reconciliation as an aide in helping to identify to these checks. You should also place a check mark by them on your prior bank reconciliation to signify that these checks have now been processed and recorded by the bank.

    4. You follow the exact same procedure for the deposits listed in the deposit section of your bank statement and the deposits recorded in your check book or register. In other words, place a check mark (or your symbol or notation) by the deposit recorded in the bank statement and also a check mark (or your symbol or notation) by the same deposit recorded in your check book or register. Again, if the amounts are different place a ? (or your symbol or notation) by the deposit on the bank statement and also a ? (or your symbol or notation) beside the deposit in your check book or register. Note that the date of the deposit on your bank statement may be the same date as recorded in your check book or a day or two later due to the time it takes the bank to process your deposit.

      Since at times some of the deposits that you prepare during a given month do not appear on your bank statement in the month written because they have not yet been "processed by your bank, you may find the deposit that you need to mark in your Check Book listed in it in an earlier month. These type of deposits are referred to as Deposits In Transit From a Prior Month. Again, you need to refer to your previous month's bank reconciliation that has these deposits listed. You should also place a check mark by them on your prior bank reconciliation to signify that these deposits have now been processed and recorded by the bank.

    5. Prepare a listing of your outstanding checks (checks that the bank has not yet processed and paid).
      Where do you think the information for this list comes from ? It's real simple, simply include all the checks (check number, date, payee and amount) from your check book or register that don't have a check mark or a ? (or the symbols or notations you use) beside them. This listing of checks is called your Outstanding Checks. Also, check that all checks listed as outstanding on the prior month's bank reconciliation have a check mark beside them. Make sure that any that don't are carried forward and included in your current month's outstanding check list.
    6. Prepare a listing of receipts / deposits (date and amount) recorded in your check book or cash register that have not been recorded in the bank statement. This is also quite simple. Simply list the deposits in your check book or register that don't have a check mark or a ? beside them (or your symbols or notations). This listing of deposits is called your Deposits In Transit. Also, check that all deposits listed as Deposits In Transit on the prior month's bank reconciliation have a check mark beside them. Normally all Deposits In Transit from a prior month should have been processed by your bank in the current month. Make sure that any that don't have a check mark are investigated.
    7. Compare any other transactions listed in your check book or register with your bank statement and place a check mark (or your symbol or notation) beside the transaction that appears in your check book and a check mark (or your symbol or notation) beside the transaction that also appears on the bank statement if the reference and/or amounts are correct. If not, place an ? (or your symbol or notation) beside the transaction on the bank statement and an ? (or your symbol or notation) beside the transaction in your check book or register.
    8. What about those cash transactions checks, deposits, etc. marked with a ? (or your symbol or notation) ?
      These are errors that need to be investigated, explained, and corrected.
    9. Review your bank statement for any other transactions that don't have a check mark or a ? (or your symbol or notation) beside them. These transactions represent transactions that have not been recorded in your check book or register.

      Examples of some transactions that you might encounter are:

      Deductions:

      • Bank Fees
      • Check and Deposit Ticket Printing Fees
      • Bank Drafts (Charges) for Insurance
      • Bank Drafts (Charges) for Note Payments
      • NSF (non-sufficient funds) or "bad checks.

      Deposits:

      • Credit Card Direct Deposits that we failed to record in our Check Book or Register
      • Bank Loans Deposited directly to our bank account
      • Interest Earned on Checking Account
    10. Review your check book or register for any other transactions that don't have a check mark (or your symbol or notation) beside them. These transactions represent transactions that have not been recorded on your bank statement and that require further investigation.
    11. Review your Listing Of Outstanding Checks and double check that the checks listed do not appear on the bank statement.

      Also review your Listing Of Deposits In Transit and double check that the deposits do not appear on the bank statement.

The simple logic behind the previous steps.

  • All transactions that have a check mark (or your symbol or notation) on the bank statement have also accurately been recorded in your check book or register.
  • Likewise, all transactions that have a check mark (or your symbol or notation) in your check book or register have also been accurately recorded on your bank statement.
  • Transactions on the bank statement that don't have a check mark or an X (or your symbol or notation) have not been recorded in your check book or register.
  • Transactions in your check book or register that don't have a check mark or an X (or your symbol or notation) have not been recorded on your bank statement.
  • Transactions that have a ? (or your symbol or notation) beside them on the bank statement and in your check book or register are possible errors and need to be investigated, explained, and corrected usually with a journal entry.
  • Transactions that appear on the bank statement or in your check book or register that are unmarked (don't have a check mark or a ? or your symbol or notation) need to be investigated and a journal entry recorded when needed.

What did I just explain above in simple man or women's language ? All a bank reconciliation involves is just comparing transactions that are entered on your bank statement and transactions that are entered in your check book or register and making sure that they agree and that all cash transactions recorded either on the bank statement or your check book have been properly recorded and accounted for . If not, adjusting entries are prepared.

We're going to use a fictitious business called Ma & Pa's Antiques to illustrate, discuss, and actually prepare bank reconciliations for three months. Well let's dig right in! Ma & Pa's January's Bank Reconciliation

Hopefully Ma does a little better job of recording deposits and checks during the month of February so that preparing the February bank reconciliation will be a little easier than January's. Ma & Pa's February's Bank Reconciliation

Need to write up the steps used in preparing the February Bank Reconciliation and how the checks were compared to the banks checks.

Well we've now prepared bank reconciliations for two months and you should have a pretty good idea of what you have to do. Let's see if you do by preparing the March Bank Reconciliation for Ma & Pa. Give It A Try

After you've completed The March Bank Reconciliation on your own check and see how you did. Did You Do It Correctly ?

What if I can't get my figures to balance ?

  • Steps To Take
  • Check your addition and subtraction if your are using a manual check book or register
  • Check the accuracy of the check amounts recorded. Make sure that the actual check amounts as recorded by the bank agree with the actual check and the same amounts that were recorded in your check book or register. We're all human and sometimes make mistakes. It's easy to record an actual check amount for $9009.00 as $9090.00. This is what is known as a transposition error.
  • Likewise, check and compare your actual deposit slip amounts with the amounts recorded by the bank. It's not that hard, to total up a bunch of checks included in a deposit slip and arrive at a wrong total amount. The bank usually sends you a correction notice when they run across these type of errors.
  • Make sure that all outstanding checks have been listed. Note, this list not only includes check written in the current period that have not been processed by the bank, but also any checks written in prior months that have still not been processed by the bank. Refer back to your prior month's reconciliation and double check that all the checks listed as outstanding have actually been processed by the bank. Make sure that any checks in the prior month's reconciliation that have still not cleared are listed in your current month's reconciliation as still outstanding.
  • Make sure you have listed all the deposits that were recorded in your check book or register and not yet processed and recorded by your bank as Deposits In Transit. Double check that your Deposits In Transit from the prior month and listed o your prior month's bank reconciliation have now been processed and recorded by your bank.
  • Make sure that you have recorded in your Check Book or Register all your Credit Card Slip Sales from your customers that are deposited directly to your bank and any other direct deposits that are made to your bank account.
  • Check and see that all bank charges, credit card processing fees, and pre authorized checks (debit memos) have all been recorded in your check book or register.
  • Review the prior month's reconciliation and make sure that all reconciling items, corrections, and adjustments to your check book or register have been recorded.
  •  
    If all else fails yell HELP and I'll come running. Seriously, don't be afraid to ask your banker, co-worker, or accountant for assistance if you need it.

Examples Of Reconciling Items and What To Do With Them

Description Of Item What To Do
Check Appears In Bank Statement But Not In Check Book Record and Deduct Check In Check Book
Check Appears In Check Book But Not In Bank Statement Deduct From Bank Statement and List as an Outstanding Check
Deposit Appears In Check Book But Not In Bank Statement Add Deposit to Bank Statement and List as a Deposit In Transit
Deposit Appears In Bank Statement But Not In Check Book Investigate and Record and Add Deposit to Check Book
Actual Check Amount Recorded in Bank Statement More than Amount recorded in Check Book. Correct check book by subtracting the difference as an adjustment to your check in your Check Book.
Actual Check Amount Recorded in Bank Statement Less than Amount recorded in Check Book. Correct check book by adding the difference as an adjustment to your check in your Check Book.
Actual Deposit Amount Recorded in Bank Statement More than Amount recorded in Check Book. Correct check book by adding the difference as an adjustment to your deposit in your Check Book.
Actual Deposit Amount Recorded in Bank Statement Less than Amount recorded in Check Book. Correct check book by subtracting the difference as an adjustment to your deposit in your Check Book.
Bank Charges & Fees Recorded in Bank Statement But Not In Check Book Record and deduct bank fees in Check Book.
Credit Card Sales Deposited and Recorded in Bank Statement But Not In Check Book Investigate, Enter, and Add Credit Card Deposit in Check Book.
Credit Card Processing Fees Recorded in Bank Statement But Not In Check Book Record and deduct Credit Card Processing Fees in Check Book.
Deductions for Pre authorized Checks (drafts) for payments such as insurance and bank loans. Record and deduct the Deduction in Check Book.
Addition and Subtraction Errors in Check Book. Enter an adjustment in the Check Book to correct the error.

Now you know how to do a bank reconciliation - don't ya ? I sure hope so.

Shoot, we learned:

  • What a Bank Reconciliation is.
  • What some of those weird words used (terminology) mean.
  • The records you need to prepare a Bank Reconciliation.
  • The Actual Steps use to prepare a Bank Reconciliation.
  • How to look for possible errors.

You can't be running around your business all the time with a camera and getting a good picture of what's going on, so what can you do ? Our next Lesson Cash Controls tells ya.

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