Accounting Reconciliation
May 4, 2022 Michael Whitmire
As a business owner,reconciling your bank accounts, credit cards, and other balance sheet accounts periodically is essential. Reconciling allows you to ensure all transactions were actually posted on the account so you can prepare complete and accurate financial statements.
So what happens when you find a difference between your records and the bank statement or other record you’re reconciling against?These differences are known asreconciling items.
A reconciling item is a transaction or other entity representing a difference between your general ledger balance and the source documentation being compared.
When you prepare your reconciliation, you adjust the balance from one source by those reconciling items to arrive at the balance of the other source.
What Are the Most Common Reconciling Items?
In a bank reconciliation, the most common reconciling items are:
- Deposits in transit.Deposits in transit are deposits made after the bank statement was issued but have already been recorded in the books.
- Outstanding checks.Outstanding checks are checks that have been written but haven’t yet cleared the bank.
While some reconciling items necessitate an adjustment to your book balance with journal entries, deposits in transit and outstanding checks do not. Instead, record them on the bank reconciliation, as these are timing differences that should be reversed during next month’s reconciliation.
Bank reconciliations are the most common kind of reconciliation. Still, you may also perform reconciliations for other balance sheet accounts, including fixed assets and depreciation, prepaid expenses, notes payable, unearned revenues, accounts payable, and accounts receivable.
What Is a Bank Reconciliation?
Abank reconciliationis one of the most common kinds of reconciliation. Every business has at least one business bank account, and companies generally reconcile their bank accounts monthly.
You prepare a bank reconciliation statement by comparing the account balance recorded in your general ledger to the amount shown on the bank statement.
It’s common to have differences between the amount recorded in the general ledger and the bank statement, but these differences should be accounted for in the reconciliation.
Bank reconciliations are a vital part of internal control for most organizations because they canhelp detect fraud and prevent errorsso you can issue accurate and timely financial reports. They also help you stay on top of cash flow by ensuring you know how much cash you have on hand.
To save time on your monthly reconciliations, useaccount reconciliation softwareor our handy Excel bank reconciliation template.
Items in a Bank Reconciliation
Several reconciling items can cause a difference between your bank and book balances. Here are several to be aware of:
- Deposits in transit.Deposits you made after the bank statement was issued have already been recorded in your books.
- Outstanding checks.Checks you issued and registered in your books have not yet been cashed or cleared your bank.
- Non-sufficient funds (NSF).Checks deposited into your bank account and were subsequently returned because the issuer didn’t have sufficient funds to cover the bill.
- Bank fees.Banks may charge monthly maintenance fees, ATM fees, excessive transaction fees, overdraft fees, insufficient funds fees, and other service charges. Typically, these fees show up on the bank statement, and you need to adjust your books to account for them.
- Interest income.If you earn interest from your bank, that interest income will show up on the bank statement. It would be best if you made an adjustment in your books to record the interest in your income statement.
- Errors.You or your bank may make errors. Correcting errors may require an adjustment to your books or a call to the bank to have the error fixed on their end.
Examples of Reconciling Items
To help you understand reconciling items better, the following items include examples of different kinds of reconciling items.
Deposits in Transit
Say you’re performing a checking account reconciliation as of May 31. Your bank statement shows a balance of $6,000, but your cash balance per the general ledger account is $7,500.
During your reconciliation, you note that you made a deposit of $1,500 on May 31, but your bank didn’t record the deposit in your account until June 1. You would have a reconciling item for the deposit in transit on your May 31 bank reconciliation.
Outstanding Checks
Say for your May 31 bank reconciliation, you show an ending balance of $5,500 in your cash account as of May 31, but your bank balance per the statement is $6,000.
During your reconciliation, you note that you wrote a check for $500 on May 29 that hasn’t yet cleared the bank. You would have a reconciling item for that outstanding check on your May 31 bank reconciliation.
NSF Checks
While performing a bank reconciliation, you note that your general ledger shows a balance of $7,000, while the bank shows a balance of $6,000. You note that a check for $1,000 that you deposited during the month was returned as the issuer didn’t have enough money in their account to cover the check amount.
You will need to reverse the deposit from your books, add the amount back to your accounts receivable balance, and ask your customer to issue a new check or pay by another means.
Bank Fees
While performing a bank reconciliation, you note that your general ledger balance is $6,000 while the bank’s monthly statement shows a balance of $5,990. You note that the bank charged a monthly maintenance fee of $10.
You will need to adjust your books to debit the $10 bank fee as an expense.
Interest Income
During the bank reconciliation process, you note that your general ledger shows a month-end balance is $6,000 while the bank records show a balance of $6,010 because the bank paid you $10 of interest during the month.
You will need to adjust your books to record the $10 of interest income.
Errors
While performing a bank reconciliation, you note that your general ledger balance is $6,100 while your bank statement balance is $6,010. You realize that you accidentally recorded a deposit in your books as $1,100 when it should have been $1,010. You will need to adjust your books to correct the transposition error.
Other errors can include withdrawals or deposits not noted in your company’s books and bank errors.
While the process of comparing your general ledger balance to another set of accounting records may sound pretty straightforward, in accounts with hundreds or even thousands of transactions, reconciliations can be time-consuming and prone to error.
That’s why we createdFloQast Reconciliation Management, an advanced workflow automation solution that works withFloQast Closetoimprove the speed and accuracy of account reconciliations. With FloQast Reconciliation Management,you can automate the reconciliation processfor multiple accounts, manage all reconciliations in one place, and collaborate with team members to achieve a faster close. To learn more about FloQast Reconciliation Management,check out this overviewand schedule a personalized demo today.
