Cash Controls

Bank Reconciliation

A bank reconciliation includes two sections: bank balance and company records. Cash controls are usually effective when adjustments can be made to reconcile the bank balance and the company balance.

The process of identifying differences between the cash bank balance and the company's records for a specified period of time is a bank reconciliation, and it is an excellent internal control tool. A document from the bank showing account activity for the month is the bank statement, which lists all deposits, checks cleared, notes collected, interest income, and service charges to the account. Timing differences will exist with outstanding checks. An outstanding check is a check that has been issued but has not yet been cleared by the bank. Another possible difference occurs with deposits in transit. A deposit in transit is a deposit that has been received by the company but is not yet shown on the bank statement because of the timing of the deposit. All transactions should still be recorded by the company until the bank statement arrives. Then the cash account should be updated with items from the bank statement that had not been recorded by the company.

The bank reconciliation is broken into two parts—the bank side and the company records side—with the goal of adjusting each side to arrive at a common adjusted balance. There are nine steps to completing a bank reconciliation manually.

Step 1: Begin with adjusting the bank's balance. Start with the ending cash balance per the bank statement.

Step 2: Add deposits in transit. The deposits in transit are all deposits made at the end of the period that are not on the bank statement because of the timing of the statement's printing. To determine deposits in transit, compare the company's records with the bank statement.

Step 3: Deduct outstanding checks. The outstanding checks are all checks written on the account that have not yet cleared the bank. To determine the outstanding checks, compare the checks written with those processed (cleared), and note those that do not appear on the statement.

Step 4: Compute the adjusted bank balance, Step 1 plus Step 2 minus Step 3. This adjusted balance will agree with the company's adjusted balance in Step 8.

Step 5: Adjust the company's cash balance. Start with the cash balance per the company's records. This is the balance in the cash account from the general ledger as of the end of the period.

Step 6: Add unrecorded credit memos. If credit memos exist, they will be listed on the bank statement and represent any cash collected on behalf of the business by the bank. Upon completing the bank reconciliation, a journal entry will be required to record any transactions found in the credit memo.

Step 7: Deduct unrecorded debit memos. These are items that have reduced the account balance. Upon completing the bank reconciliation, a journal entry will be required to record any transactions found on the debit memo.

Step 8: Compute the adjusted balance per the company's records, Step 5 plus Step 6 minus Step 7. This adjusted balance will agree with the bank's adjusted balance in Step 4.

Step 9: Compare the adjusted bank balance and the adjusted balance per the company's records. The balances should be the same. If the balances differ, there is an error present. Two common recording errors are recording a check in the company's records for one amount but writing the check for another amount and subtracting an amount in the records when it should have been added. Carefully repeat the nine steps until the discrepancy is found. The error must be corrected and properly journalized. Note that all items adjusted to the book balance will require an adjusting journal entry.

Bank Reconciliation

Bank Company Book
Ending balance per bank (Step 1) $23,073 Ending balance per books (Step 5) $23,545
Add: Deposits-in-transit (Step 2) $400 Add: Unrecorded deposits (Step 6) $300
Subtract: Outstanding checks (Step 3) ($120) Add: Interest income (Step 6) $85
Add/Subtract: Recording errors (Step 6) ($22)
Subtract: Unrecorded withdrawals (Step 7) ($20)
Subtract: NSF returned checks (Step 7) ($525)
Subtract: Bank service charges (Step 7) ($10)
Adjusted Balance (Step 4) $23,353 Adjusted Balance (Step 8) $23,353

To ensure that the bank reconciliation process is devoid of fraudulent behavior, the person preparing the bank reconciliation should not have any cash duties beyond the reconciliation.