BANK RECONCILIATION: Timing Differences, Errors, Adjusting Entries
- Graziano Stefanelli
- 2 days ago
- 2 min read
A bank reconciliation matches a company’s internal cash records to the bank statement. It ensures accuracy in cash reporting by identifying timing differences, unrecorded transactions, and errors.
1. What Is a Bank Reconciliation?
A bank reconciliation compares the ending balance in the company’s cash account with the ending balance shown on the bank statement.
Discrepancies are typically caused by:
Timing differences
Outstanding checks
Deposits in transit
Bank fees or interest
Recording errors
2. Common Timing Differences
Item | Description |
Outstanding checks | Written by company, not yet cleared by bank |
Deposits in transit | Recorded by company, not yet received by bank |
Bank service charges | Deducted by bank, not yet recorded by company |
Interest income | Added by bank, not yet recorded by company |
3. Example Reconciliation Format
Bank statement balance:
Deposits in transit– Outstanding checks± Bank errors (if any)= Adjusted bank balance
Book (ledger) balance:
Interest income– Bank fees± Company errors= Adjusted book balance
The two adjusted balances must equal.
4. Adjusting Entries in Company Books
After completing the reconciliation, adjusting entries are made for any unrecorded transactions found on the bank statement.
Examples:
Bank fee deduction:
debit Bank Fees Expense
credit Cash
Interest income:
debit Cash
credit Interest Income
NSF (bounced) check:
debit Accounts Receivable
credit Cash
5. Errors and Corrections
If the company discovers an internal error (e.g., recorded $650 instead of $560), it must correct it:
debit or credit Cash (to adjust difference)
offsetting entry based on original transaction
Bank errors should be reported to the bank but not adjusted in the company’s books unless confirmed.
6. Frequency and Best Practices
Reconciliations are typically done monthly, but high-volume companies may reconcile weekly or daily.
Maintain supporting documentation for all adjustments.
Use a template for consistency and audit readiness.
Review by a supervisor ensures internal control.
7. Financial Reporting Impact
Bank reconciliations do not appear in the financial statements but support the accuracy of the cash balance on the balance sheet.
Unreconciled differences could:
Indicate fraud or theft
Lead to misstated cash balances
Trigger audit findings
Key take-aways
Bank reconciliations align company records with actual bank balances.
They identify timing differences, errors, and unrecorded transactions.
Adjusting entries are made to update the company’s books.
Routine reconciliations strengthen financial accuracy and internal control.
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