Management Acct Learning Centre

Bank Reconciliation

The purpose of bank reconciliation is to adjust both the company’s record of its chequing
account and the bank’s record of the chequing account so that the accounts are equal (or
balanced). The usual transactions to adjust for are:

(1) deposits in transit: deposits the company knows it has made but the bank has not
processed yet (add to bank balance)
(2) outstanding cheques: cheques the company knows it has issued but the bank has not
processed yet (deduct from bank balance)
(3) service charges: bank charges that the company hasn’t yet recognized (deduct from book
balance)
(4) not sufficient funds (NSF): a cheque that was not honored by the bank because the
account it was written from did not have enough money (deduct from book balance)
(5) errors: the company incorrectly records the amount of a deposit or cheque, forgets to
record a deposit or cheque, or the bank incorrectly debits or credits the company (add or deduct
to book or bank depending on the error)

The basic strategy: look for differences in the two statements (and possibly the previous
month’s reconciliation if included).

The detailed strategy:

Step 1: Adjusting the Balance per Bank

- Find the balance shown at the end of the month, then state the adjustments.
- Identify deposits in the book balance that the bank balance is missing (or from the
previous month’s reconciliation). Add those to the bank balance
- Identify payments (cheques) in the book balance that the bank balance is missing (or
from the previous month’s reconciliation). Deduct those from the bank balance.
- Bank errors are mistakes made by the bank. Depending on the error, the correction
could increase or decrease the balance shown on the bank statement. For instance if
the bank incorrectly debited a transaction to the company’s account that had not been a
cheque drawn by the company, this amount would be added back into the bank balance.

General format for adjustments of the bank balance

Bank Statement Balance

Adjustments:
Add: Deposits in transit
Deduct: Outstanding cheques
Add or Deduct: Bank errors
Reconciled Balance per Bank

Authored by Nabeela Rahman &

Emily Simpson
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Step 2: Adjusting the Balance per Books
- Find the balance shown at the end of the month, then state the adjustments.
- Add interest earned to the book balance.
- 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. For instance, if the bank records a deposit that
the company forgot to write down in its books, it must add that amount in the adjustment
of the book balance. If the company incorrectly records the amount of a payment cheque,
it must add or deduct the difference (depending on whether the book value is too large
or too small)
- Deduct any bank service charges or NSF as noted in the bank balance.

Book Balance
Adjustments:
Add: Interest earned
Add or Deduct: Errors in company's Cash account
Deduct: Bank service charges
Deduct: NSF cheques & fees
Deduct: Cheque printing charges
Reconciled Balance per Books

Step 3: Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and the balance per books (Step 2), the two
adjusted amounts (reconciled balance) should be equal.

Example: A bakery specializing in birthday cakes completes monthly bank reconciliations as

part of its internal control process. The bank statement for the month of January shows a bank
balance of $7,224.28. The company’s book balance on January 31 was $7,510.74. The bank
statement indicated that the bakery received $28.96 in interest and was charged $4.00 for bank
service charges, $32.00 for a new checks, and $200.00 for an NSF check. Deposits in-transit
were $1,884.52 and outstanding checks totalled $1,805.10. Prepare the bank reconciliation for
the month ended January 31.

Solution:
Bank Balance Statement $7,224.28 Book Balance $7,510.74
Add: Deposits in transit $1,884.52 Add: Interest earned $28.96
Subtotal $9,108.80 Subtotal $7,539.70

Less: Outstanding checks ($1,805.10) Less: Bank service charges $4.00

Less: New checks $32.00
Less: NSF checks $200.00
Subtotal ($236.00)

Reconciled Balance $7,303.70 Reconciled Balance $7,303.70

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Practice Problems

1. The following actions relate to bank statement reconciliation. Match the lettered items to
the numbered items. (A numbered item can have more than one lettered item.)
a. NSF charge made by the bank.
b. A check listed as outstanding last month that is still outstanding.
c. A deposit of $221 was recorded as $212 in the company’s book.
d. Interest earned on a company’s bank account.
e. A deposit made by the company, but not recorded on the bank statement.
i. _____ Add to the company’s book iii. _____ Add to the bank statement
balance. balance.
ii. _____ Deduct from the iv. _____ Deduct from the bank
company’s book balance. statement balance.

2. The July 31 bank statement for a catering company reported a balance of $15,014. The
company’s book balance shows $19,960. Two checks written by the company are
outstanding, #333 and #336 in the amounts of $1,680 and $1,120, respectively. Interest
earned and paid to the catering company was $428 and had not been recorded in the
company’s accounts. The bank had, in error, charged a check of another company to the
catering company in the amount of $140. The bank charged the firm $24 for service
charges. A deposit in the amount of $8,010 remains in transit, since it was not deposited
in time to be shown in the July bank statement. Prepare the bank reconciliation for July.

3. The bank reconciliation at the end of March, bank statement of April, and book
statement of April is given. Prepare the bank reconciliation for the end of April.
Bank Reconciliation (March)
Bank Balance $10,000
Add: Deposits in transit $200
Total $10,200
Less: Outstanding checks
# 201 $60
# 209 $70
Adjusted Balance $10,070

Cash Book Statement (April) Bank Statement (April)

Cash Book Balance $10,070 Bank Balance $10,000
Cash receipts Cash payments Deposits Checks & Debits
Apr 10 $220 # 210 $36 Apr 01 $200 # 201 $60
Apr 20 $340 # 211 $64 Apr 10 $220 # 212 $18
Apr 28 $400 # 212 $18 Apr 20 $340 # 213 $199
Apr 30 $250 # 213 $199 Apr 25 $600 # 215 $300
Total $1,210 # 215 $300 Apr 28 $400 # 216 $210
# 216 $120 Total $1,760 # 217 $107
# 217 $107 NSF $250
# 218 $120 S.C $30
# 219 $57 Total $1,174
Total $1,021
Balance $10,259 Balance $10,586

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Solutions
1.
i. c, d iii. e
ii. a iv. b

2.
Bank Reconciliation

Bank Balance Statement $15,014 Book Balance $19,960

Add: Deposit in transit $8,010 Add: Interest earned $428
Add: Bank error $140 Subtotal $20,388
Subtotal $23,164
Less: Bank service charges ($24)
Less: Outstanding checks
#333 $1,680
#336 $1,120
Total: ($2,800)
Reconciled Balance $20,364 Reconciled Balance $20,364

3.
Bank Reconciliation

Bank Balance Statement $10,586 Book balance $10,259

Add: Deposits in transit 250 Add: Deposit (Apr 25) 600

Subtotal $10,836 Subtotal $10,859

Less: Outstanding Checks Less: NSF $250

# 209 $70 Less: Bank Service charges $30
# 210 $36 Less: Error in #216 $90
# 211 $64 Total ($370)
# 218 $120
# 219 $57
Total: ($347)

Reconciled Balance $10,489 Reconciled Balance $10,489

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