Bank Reconciliation

A bank reconciliation reconciles the cash balance recorded in the general ledger to the balance reported by the bank at the same date. The two figures are almost never equal, and the reconciliation is the document that explains why, item by item, until both sides arrive at the same adjusted balance.

The differences fall into three groups, and the group determines the treatment. Timing differences are transactions recorded by one party and not yet by the other: deposits in transit and outstanding checks are recorded in the ledger and not yet at the bank, while items in transit at the bank have not reached the ledger. These need no entry, only tracking, because they clear on their own. Bank-only items are transactions the bank recorded that the business has not: service charges, interest credited, returned deposits, wire fees, lockbox activity, and automatic debits. These require journal entries, because the ledger is genuinely missing them. Errors can sit on either side and are corrected where they were made, with a bank error pursued through the bank rather than adjusted away in the ledger.

The standard format works from both directions to a common figure. Start with the bank balance, add deposits in transit, subtract outstanding checks, and adjust for bank errors. Separately, start with the ledger balance, add or subtract the bank-only items, and adjust for ledger errors. When the two adjusted balances agree, the account is reconciled. When they do not, the difference is unexplained and the reconciliation is not complete, whatever the workbook says.

The signals that a reconciliation is being performed rather than produced are all in the reconciling items. Aged items are the first: a deposit in transit outstanding for four months is not in transit, it is a problem. Checks outstanding past their staleness window need to be voided or escheated. A plug line, however it is labeled, means the account does not reconcile. A large number of small offsetting items usually means an interface between two systems is dropping transactions. And reconciliations prepared long after period end are of limited value, because the errors they would have caught have already flowed into the reported statements.

The control expectations are conventional and worth stating because they are frequently missed in smaller organizations. The person preparing the reconciliation should not be the person who handles cash receipts, disbursements, or the bank relationship. A second person should review and evidence the review with a date. Reconciling items should carry an owner and an expected resolution. And the reconciliation should be prepared for every bank account, including the dormant ones, which is where misappropriation tends to hide.

Related terms: Account Reconciliation, Month-End Close, General Ledger, Trial Balance

Related skills: Bank rec to GL, Bank rec review, Bank statement to Excel

Go deeper: Accounting Automation

Matching a statement against a ledger, month after month, across every account, is the definition of work that should not consume a qualified person's day. Adopt's agents match the population, post the bank-only items, and hand over only the exceptions with the evidence attached. Sign up free.