How do you record bank errors in bank reconciliation?
Template | Examples | Step-by-Step Process | Top Tips for reconciling bank statements Show
Emilie N.- FCCA, CB, MBS Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups. What is a Bank Reconciliation?A bank reconciliation is a comparison of an entity’s bank account statement to its internal accounting records of bank transactions with the objective to identify and adjust any timing differences, omissions or errors and report the correct cash balance in the entity’s financial statements.
Theoretically, the transactions listed on a business’ bank statement should be identical to those that appear in the accounting records of the business, with matching ending cash balances on any given day. In reality, though, a company’s bank statement and in its cash book will rarely agree because of:
This is why companies prepare bank reconciliations, where they match bank statement transactions to the corresponding entries in their accounting records, determining the differences between the two in order to:
After all adjustments, the ending balance of the cash book should equal the bank statement. The reconciled and adjusted cash book balance is reported in a company’s financial statements. Bank reconciliation is often referred to simply as bank rec. 4 Simple Steps: How To Do a Bank Reconciliation?To reconcile a bank statement cash balance, add back deposits in transit and deduct uncleared checks. Next, add interest to the cash balance in a company's books and subtract bank fees and rejected checks. Finally, add or deduct any other items or errors to match the bank and book cash balances. The bank reconciliation procedure contains 4 steps:
Let’s take a closer look at each of these steps in a bank reconciliation process >>> Step 1: Adjust Bank Statement for Timing DifferencesThe first step in the bank reconciliation process flow is to adjust the ending cash balance on a bank statement for receipts and disbursements of cash and checks that have been entered into a company’s accounting general ledger but are yet to appear on its bank account because of a bank clearing process and other timing differences. Systematically compare a company’s list of issued checks and deposits to those shown on a bank statement in order to identify any outstanding checks and deposits: Additions to a bank statement:Add back any receipts for deposits in transit from a company to the bank, which have been paid in but not yet processed by the bank. Deposits in transitCash and checks received and recorded by a business but not yet credited to its bank statement. For example:
Deposits in transit are also known as:
Deductions from a bank statement:Subtract any drawn checks that have been written to make a payment but not yet cleared by the bank. Outstanding checksChecks that have been issued by a business to creditors and credited in a cash book–but the payments have not yet been processed by a bank and so do not appear on a bank statement.
Tip: Debits and credits are reversed in bank statements–compared to business accounting records–because the bank is showing the transactions from its perspective.
Step 2: Adjust Cash Account for Unrecorded ItemsNext, systematically compare the bank statement items with the company’s general ledger cash account to identify any unrecorded receipts and disbursements that have been reported by the bank but are omitted from the accounting records of a business. Some transactions first appear in a bank statement before they are entered into the cash book simply because the business is unaware of their existence until it receives the bank statement. Additions to a cash account:Interest incomeInterest earned on a bank account balance. Direct ReceiptsCredit memos for funds received directly into a bank account and not recorded in the cash book, such as wire transfers from another company bank account, direct debits, standing orders, dividends, or notes collected on behalf the depositor by the bank. Deductions from a cash account:Bank charges and service feesBanks deduct fees and charges for services they provide to customers, such as monthly maintenance of a bank account’s activity, accepting checks and deposits, interest on overdrafts, late payment penalties, or safe-deposit box rent. Rejected customer checksNSF (Not Sufficient Funds) checks that have been dishonored by a bank due to insufficient funds in the issuer’s bank account. Direct PaymentsDebit memos for funds deducted directly from a bank account and not entered into a cash book, such as standing orders, direct debits, notes paid by the bank on behalf of the depositor, or money transfers to other bank accounts that belong to the company. Step 3: Adjust Cash Account and Bank Statement for ErrorsMoreover, the bank reconciliation helps to detect accounting errors that are common to every business, as well as any fraudulent transactions. Errors could include omission, entering the wrong amount, or recording an item to the incorrect account. Errors in calculation or recording of payments are more likely made by business staff than by a bank. Nevertheless, while bank errors are very rare, it is still a possibility. Step 4: Correct Cash Account in General LedgerAs a final step of the bank reconciliation process, correct any omissions and errors in the accounting records of a business by posting adjusting journal entries to the cash account in the general ledger. The bank statement is reconciled when the adjusted cash balance as per bank equals the adjusted cash balance as per company books. Once the true cash balance is calculated, the company will post journal entries to the accounting general ledger for all items identified during the reconciliation in order to adjust the original ending cash account balance to the correct cash balance. The adjusting cash account journal entries will contain:
Consequently, the company’s general ledger cash account and its balance sheet will reflect the reconciled, adjusted, correct and true cash balance. Here’s a summary table of all bank reconciliation adjustments >>>
Notice that there are no journal entries posted for the bank statement adjustments (Step 1) because those are only used in the reconciliation process to calculate at the “correct” adjusted cash balance. In other words:
All of the bank reconciliation adjustments and corrections are captured in a bank reconciliation statement >>> Template: 4 Bank Reconciliation Statement ExamplesA bank reconciliation statement is a schedule prepared by a company in an electronic or paper format as part of a bank reconciliation process that compares the company’s general ledger cash account with its bank statement to ensure every transaction is accounted for and the ending balances match. The 4 most common formats of a bank reconciliation statement are shown below: Example #1 of Bank Reconciliation Statement Template
Example #2 of Bank Reconciliation Statement Template
Example #3 of Bank Reconciliation Statement Template
Example #4 of Bank Reconciliation Statement Template
While the bank reconciliation statement can have many different formats, they all have the same goal of identifying and explaining the discrepancies between the cash balance on a bank statement and in a company’s books so that the company can make the appropriate changes to its accounting records. The final balance on the bank reconciliation statement, after all corrections and adjustments, is the actual “true” cash balance reported in the company’s balance sheet. Example: Practical Exercise with SolutionAs of 30 September 20XX, the ending debit cash balance in the accounting records of Company A was $1,500, whereas its bank account showed an overdraft of $500. After systematically going through the bank statement items and cash book entries, the following 11 discrepancies were found: 1. Bank Statement - Timing DifferencesThe company’s accounting records contain the following 2 items that are not on the bank statement: 1.1. Company A paid $3,750 worth of checks into its bank account and debited its cash book accordingly, but the bank has not yet credited the funds to the depositor’s account. 1.2. Company A issued $1,250 of checks to pay its creditors but they have not yet been cleared by the bank and deducted from the payer’s account. 2. Accounting Records - Omissions & ErrorsThe bank statement contains the following 9 items that are not in the company’s accounting records: 2.1. Interest earned by the depositor and paid by the bank of $55. 2.2. A note receivable of $1,075 collected by the bank. 2.3. Dividends amounting to $1,335 received directly from an investment account. 2.4. Monthly bank service charge of $15 for operating the bank account. 2.5. Overdraft fee of $100 as a penalty for a negative bank balance. 2.6. Customer check of $1,250 deposited by Company A has been returned and charged back as NSF (not sufficient funds). 2.7. NSF fee for the rejected dishonored check of $10 charged by the bank. 2.8. Direct debit payments of $500 automatically deducted from the account. 2.9. Error in a payment to a creditor, which was correctly processed by a bank as $2,435 but recorded in the cash book as $2,345. Task #1: Bank Reconciliation StatementPrepare a bank reconciliation statement for Company A as of 30 September 20XX.
After all reconciliation adjustments, the final correct cash balance captured in the company accounting records and on its balance sheet as at 30 September 20XX was $2,000. Task #2: Cash Book Journal EntriesDraft the required bank reconciliation adjusting journal entries for the cash account in the company’s general ledger.
Who should perform bank reconciliations?A bank reconciliation should be performed by an independent person who is not otherwise involved in the cash cycle so that segregation of duties is established in order to prevent fraud as an important part of a company’s internal controls over its cash assets. How often should you reconcile bank statements?Bank reconciliations should be performed at least at the end of each month, or more often in a business with a large number of transactions. More frequent reconciliations, weekly or daily, increase efficiency as there are fewer transactions to process at any one time and issues are detected sooner. In the past, monthly reconciliations were the norm because banks used to issue paper statements on monthly basis. Today, online banking and accounting software offer real-time feeds and automated transaction matching. As a result, bank transactions can be automatically imported into an accounting software, where one is able to categorize and match a large number of transactions with one click of a button. This significantly reduces the effort that goes into the reconciliation process and enables businesses to verify their cash balances anytime throughout the month.
Emilie N., FCCA, CB, MBS Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups. Sign up for our Newsletter Get more articles just like this straight into your mailbox. What is bank error in bank reconciliation?A bank error is defined as an incorrect debit or credit on the bank statement of a check or receipt that the banking institution may correct at a later date. Since the correction will only appear on a future statement, an adjustment is required on the current bank reconciliation in order to reconcile.
What happens if there is a mistake on a bank statement?If the bank discovers the error, they can withdraw the funds without your permission, freeze your account or place a hold on the funds. Any checks you've written could bounce; automatic bill payments you've set up may not get funded. If your bills don't get paid on time, you might face late fees from creditors.
How are bank errors recorded on the bank reconciliation quizlet?Preparing the Book Side of the Bank Reconciliation: How is a Bank Error corrected? Errors are always recorded on the side of the reconciliation of the party that made the error. If the bank made the error, it is recorded on the bank side, if the business made the error, it is recorded on the book side.
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