Bank Reconciliation: A Step-by-Step Guide to Detecting and Closing Discrepancies
Bank Reconciliation: A Step-by-Step Guide to Detecting and Closing Discrepancies
Cash is the most sensitive asset in any company. Bank Reconciliation is the process that ensures the “Ledger Balance” and the “Actual Bank Balance” are identical. Discrepancies often arise from timing gaps (like checks in transit) or bank fees you haven’t recorded yet. This guide provides the practical path for preparing a Bank Reconciliation Statement and adjusting your entries correctly—Digital Salla.
- Detailed definition of Bank Reconciliation and its importance.
- The 3 common reasons for discrepancies (Timing, Errors, Bank Items).
- Reconciliation Bridge (SVG): From unadjusted to adjusted balance.
- How to adjust the Bank Side (Transit items).
- How to adjust the Book Side (Fees, Interest, NSF).
- Practical Journal Entries resulting from reconciliation.
- Interactive Tool: Bank Reconciliation Simulator.
1) What is Bank Reconciliation? (The Proof of Balance)
It is an internal auditing process that matches the cash balance on a company’s Balance Sheet to the corresponding amount on its Bank Statement. The goal is to ensure that every cent is accounted for and that any Accounting Errors or bank omissions are corrected immediately.
2) The Reconciliation Bridge: The Two Sides (SVG)
Reconciliation requires balancing two parallel paths to reach the same “Corrected Balance”.
3) Common Discrepancy Reasons: Why don’t they match?
- Timing Gaps: Transactions recorded by one party but not yet by the other (e.g., checks you mailed but haven’t been cashed yet).
- Bank Items: Changes the bank made to your account that you only discover from the statement (Bank fees, interest, NSF checks).
- Recording Errors: Human mistakes on either side, such as entering $150 instead of $105.
4) Adjusting the Bank Statement Side
This side reflects what the bank *doesn’t know yet*:
Corporate Card Reconciliation - Excel Template
- ADD Deposits in Transit: Cash/checks received and recorded by you but deposited late.
- DEDUCT Outstanding Checks: Checks you issued but haven’t been presented to the bank yet.
- Bank Errors: Corrected directly on this side if the bank made a mistake (uncommon).
5) Adjusting the Company Books Side
This side reflects what you *didn’t record yet*:
- ADD Interest Earned: Income the bank added to your account.
- ADD Collections: Amounts the bank collected on your behalf (e.g., notes receivable).
- DEDUCT Bank Fees: Monthly maintenance or transfer fees.
- DEDUCT NSF Checks: Bounced checks from customers that were originally recorded as receipts.
- Book Errors: Corrected here if you recorded a wrong amount in your ledger.
6) Interactive Tool: Bank Reconciliation Simulator
Fill in the data below to see how the reconciliation statement is built.
7) Journal Entries After Reconciliation
Only adjustments to the Book Side require journal entries. The bank side adjustments are just timing differences that will resolve themselves.
| Case | Debit Account | Credit Account |
|---|---|---|
| Bank Fees | Bank Service Expense | Cash / Bank |
| Interest Earned | Cash / Bank | Interest Income |
| Bounced Check (NSF) | Accounts Receivable (Customer) | Cash / Bank |
8) Frequently Asked Questions
How often should Bank Reconciliation be performed?
Monthly is the minimum requirement, but for companies with high transaction volumes, weekly or even daily reconciliation is best for tight control.
Is a Bank Reconciliation Statement part of the public financial reports?
No. It is an internal control document. Only the final “Adjusted Balance” is reflected in the Cash line of the Balance Sheet.
What if I find a discrepancy I can’t explain?
You must investigate further by matching individual receipts and check stubs. If it remains unresolved, it might be recorded as “Cash Short and Over” until the error is found.
9) Conclusion & Summary
Bank Reconciliation is the “Gatekeeper” of cash integrity. By systematically identifying timing gaps and recording unbooked fees or interest, you ensure that the company’s liquid assets are reported accurately and protected from oversight—Digital Salla. Always close your reconciliation with the required adjusting entries to keep your books synced with reality.