What is a bank reconciliation?
A bank reconciliation explains the difference between the cash balance on the bank statement and the cash balance in the company's books. Both sides are adjusted until they show the same adjusted cash balance, the true amount of cash.
The layout
Worked example
Bank side: $8,000 + $1,500 deposits in transit − $2,200 outstanding checks = $7,300. Book side: $7,180 + $400 note collected + $40 interest − $20 service charge − $300 NSF check = $7,300. The balances match, and the four book-side items are recorded with journal entries.
Frequently asked questions
What goes on the bank side of a reconciliation?
Items the bank doesn't know about yet: deposits in transit (add) and outstanding checks (subtract), plus any bank errors.
What goes on the book side?
Items the company doesn't know about until it reads the statement: collections by the bank and interest (add), and service charges and NSF checks (subtract), plus any errors in the books.
Which items need journal entries?
Only the book-side items. They change the company's Cash account, so each one is recorded with a journal entry.
What if the adjusted balances don't match?
Look for a missing item, a number entered on the wrong side, or a transposed figure. A difference divisible by 9 often means two digits were swapped.