Bank Reconciliation
Match your books to the bank statement and find the true cash balance.
In your head, jot if needed · no calculator why?
Opens at level 27. You're level 1. You can read and practice here now.
the idea
A bank reconciliation matches your books (the ledger) to the bank statement, to find the true cash balance. They rarely agree at first, because each side knows things the other does not yet.
The bank already knows about its fees, interest it paid you, and customer checks that bounced; your ledger needs those. Your ledger already knows about deposits the bank has not posted (deposits in transit) and checks your suppliers have not cashed (outstanding checks); the bank figure needs those. Fix each side, and both should land on the same number.
techniques
Fix the ledger side
- Start with the ledger balance.
- Subtract bank fees and bounced checks.
- Add interest the bank paid you.
- Record each one in your books, like a bank-fee expense. Never invent revenue to force a match.
worked example
The ledger shows $1,800. The bank statement includes a $25 service fee and $6 of interest earned, neither of which is in the ledger yet. What is the corrected ledger cash balance?
- Corrected ledger: $1,800 − $25 + $6 = $1,781.
Answer: $1,781
Fix the bank side
- Start with the bank statement balance.
- Add deposits in transit.
- Subtract outstanding checks: they will still come out.
- The bank's own mistakes are corrected on this side too.
worked example
The bank statement shows $4,000. A $600 deposit is still in transit, and checks totaling $900 haven't cleared. What is the adjusted bank balance?
- Adjusted bank: $4,000 + $600 − $900 = $3,700.
Answer: $3,700
Meet in the middle
- Fix the ledger side and the bank side separately.
- Both give the true cash balance. If they differ, look for a missed item.
worked example
The ledger shows $2,050; the bank statement shows $2,300. There's an unrecorded $50 bank fee, a $400 check that hasn't cleared, and a $100 deposit in transit. What is the true cash balance?
- Ledger side: $2,050 − $50 = $2,000.
- Bank side: $2,300 + $100 − $400 = $2,000.
Answer: $2,000
watch out for
- Adding a bank fee to the ledger instead of subtracting it.
- Adding outstanding checks to the bank balance. They will still come out of the account.
- Adjusting the ledger for an uncashed check, which records the payment twice.
- Trusting the bank statement as it stands, or fixing only one side and stopping.
practice
Corrected ledger balance
worked example
The ledger shows $9,215. The bank statement includes $2 of interest earned and a $1,760 customer check that bounced, neither of which is in the ledger yet. What is the corrected ledger cash balance?
Answer: $7,457.00
- Record what the bank already knows: $9,215 + $2 (interest) − $1,760 (bounced check) = $7,457.
- The interest is recorded as income. The bounced check goes back into accounts receivable: the customer still owes it.
Adjusted bank balance
worked example
The bank statement shows $2,020. A $650 deposit is still in transit, and checks totaling $600 haven't cleared. What is the adjusted bank balance?
Answer: $2,070.00
- Adjusted bank = statement + deposits in transit − outstanding checks
- = $2,020 + $650 − $600 = $2,070.
Adjust the books or the bank side?
worked example
The bank paid $1,075 of interest into the account, and you haven't recorded it. Which side of the reconciliation gets adjusted?
- No adjustment needed
- Adjust the bank side
- Adjust both sides
- Adjust the ledger (book) side
Answer: Adjust the ledger (book) side
- Items the bank hasn't seen yet, and the bank's own mistakes, adjust the bank side. Items the bank knows about that you haven't recorded (fees, interest, bounced checks, your own typos) adjust the ledger.
- The bank already knows about this and your books do not, so the ledger side changes.
Find the true cash balance
worked example
The ledger shows $12,145; the bank statement shows $13,760. There's an unrecorded $85 bank fee, a $1,940 check that hasn't cleared, and a $240 deposit in transit. What is the true cash balance?
Answer: $12,060.00
- Ledger side: $12,145 − $85 = $12,060.
- Bank side: $13,760 + $240 − $1,940 = $12,060.
- The two sides match, so the books reconcile.