Bank reconciliation: Example

In this video, we explain bank reconciliation using an example.

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Bank Reconciliation Example

Bank reconciliation is the process of ensuring that the cash balance on a company's books matches the balance shown on its bank statement. This example demonstrates how to reconcile a bank statement with a company's cash records by accounting for outstanding checks, deposits in transit, bank fees, and errors.

Scenario
Company's Books:

Cash balance at the end of the month: $5,000
Bank Statement:
Bank balance at the end of the month: $4,500

The differences between the bank statement and the company's books are caused by outstanding checks, deposits in transit, and other transactions not yet recorded in one of the records.

Steps for Bank Reconciliation
Compare the Bank Balance and Cash Balance
Start by comparing the ending balances. The bank statement shows a balance of $4,500, while the company's books show $5,000. The difference needs to be reconciled.

Identify Outstanding Checks
Outstanding checks are those written by the company but not yet cleared by the bank. Let’s say the company issued a check for $800, but it hasn’t been processed by the bank. This needs to be subtracted from the company’s cash balance to reflect that the bank hasn’t yet accounted for this check.

Outstanding check: $800
Record Deposits in Transit
Deposits in transit are amounts that the company has deposited into the bank but are not yet reflected in the bank statement. Let’s assume the company made a deposit of $1,200 on the last day of the month, but it hasn’t been credited to the bank account yet. This amount should be added to the bank balance.

Deposit in transit: $1,200
Adjust for Bank Fees
Banks often charge fees for services, which may not yet be recorded in the company’s books. The bank charged a $50 fee for wire transfers, which needs to be subtracted from the company’s cash balance.

Bank fee: $50
Correct Errors
Sometimes, either the bank or the company may make an error. For example, the company may have accidentally recorded a check for $300 as $350. This $50 error should be corrected in the company’s books.

Error correction: +$50
Reconciliation Process
Adjust the Bank Balance
Starting with the bank’s ending balance of $4,500, make the following adjustments:

Add deposits in transit: +$1,200
Subtract outstanding checks: -$800
Adjusted Bank Balance = $4,500 + $1,200 - $800 = $4,900

Adjust the Company’s Cash Balance
Starting with the company’s book balance of $5,000, make the following adjustments:

Subtract bank fees: -$50
Add error correction: +$50
Adjusted Cash Balance = $5,000 - $50 + $50 = $5,000

Final Reconciliation
After making the necessary adjustments, the adjusted bank balance is $4,900, and the adjusted cash balance is $5,000. The $100 difference is due to timing differences between the bank and the company’s records (deposits in transit and outstanding checks).

Conclusion

In this example, the bank reconciliation highlights the importance of adjusting for outstanding checks, deposits in transit, and bank fees to ensure that the company’s cash records are accurate. Regular bank reconciliations help detect errors, manage cash flow, and prevent discrepancies between bank and company records.

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