The bank reconciliation is a comparison of this general ledger account with the company’s bank account, as evidenced by a bank statement sent by the company’s bankers, usually at the end of the month. The cut-off date could be different from the end of the month, depending on the end date of the company’s accounting period. The bank reconciliation should be prepared to find items that are missing or not adequately addressed in any of the accounts.

The most common differences and their treatment are:

Bank charges Each month, the bank usually charges a fee for the operation of the bank account. Generally, this fee is not posted before the end of the month. Through an agreement, the bank can apply a fixed charge for the interest on the loan, repayment of the loan, etc. that the accountant may have forgotten to record in the general ledger.

To correct this omission: [Debit Bank Charges, interest etc and credit the bank account in general ledger.]

Deposits in transit: This is a temporary difference and is due to the fact that the bank may not have accounted for the deposits near the end of the month, as the deposits arrived after the end of the month. No ledger entry is required for this item.

Pending Checks These represent checks that were written in a particular month, but were not cashed by the payee at the end of that or the end of the following month. No ledger entry is required for this item.

Checks issued and later canceled These represent checks that the payee may have reported as lost. The accountant called the bank and stopped the payment, but did not record the entry in the ledger.

Accounting entry: debit to the bank account to which the check was credited when it was paid and debit to the corresponding expense account, thus reversing the expense.

Bank Issued Loan Funds Sometimes getting a loan approved by the bank can be exciting. Once the excitement is over, everyone forgets to record the entry in the ledger. To correct this omission, debit the ledger bank account established to represent the loan amount, credit the corresponding loan account to show the liability.

The above list of reconciliation items is not exhaustive, but represents some of the items that might need adjustment at the end of the period.

Building reconciliation:

Using the items listed above, the reconciliation would be prepared as follows:

Balance per bank statement as of … 2011 … let’s say $ 220,000

Add:
Deposits in transit say 30,000

Less:
Checks issued not yet cashed (35,000)

Reconciled Balance of Bank Statement $ 215,000

General Ledger Bank Account Balance 111,200

Add: bank loan received 100,000

Check issued and later canceled 4,000

Less: bank charges (200)

Bank account reconciled from the general ledger $ 215,000

The above statement shows that the correct bank balance at the end of the period is $ 215,000, this will be the balance after the adjusting journal entries to record the bank loan, the canceled check, and the bank charges have been posted in the period of correct report. The bank statement currently shows $ 220,000 because the bank has not yet received a deposit of $ 30,000 and the payee has not cashed checks for $ 35,000.

NEXT: Our next article will discuss the importance of bank reconciliation.

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