Your cash account says one number. The bank statement says another. Both can be right at the same time, because each side knows about things the other has not recorded yet. A bank reconciliation explains the gap item by item, and ends with one figure both sides agree on: the true cash balance. It is one of the most tested topics in introductory accounting, and also one of the easiest to get full marks on once you know which items go on which side.
Why the Two Balances Differ
Every difference falls into one of two groups:
- Things the company knows but the bank does not yet: deposits made late on the last day (deposits in transit) and checks written but not yet cashed (outstanding checks).
- Things the bank knows but the company does not yet: service charges, interest earned, customer checks that bounced (NSF checks), and collections the bank made on the company's behalf.
Errors can sit on either side, but in exam questions they are almost always in the company's books.
The Two-Column Layout
Reconcile each balance separately to the same adjusted cash balance. Never adjust one side to the other.
| Bank side (balance per bank statement) | Book side (balance per general ledger) |
|---|---|
| + Deposits in transit | + Collections by the bank (notes, interest earned) |
| − Outstanding checks | − Service charges and fees |
| ± Bank errors | − NSF checks |
| ± Errors in the company's books |
The rule that saves the most marks: only book-side items need journal entries. Bank-side items are timing differences that will clear on their own next month. The bank's records are not yours to correct.
Worked Example: Harbor Lane Bakery, October 31
Harbor Lane Bakery's ledger shows a Cash balance of $7,444. The October bank statement shows $8,420. Comparing the two reveals:
- A deposit of $1,250 made on October 31 does not appear on the statement.
- Checks #412 ($640) and #415 ($1,115) have not cleared the bank.
- The bank collected a $1,000 note receivable for the bakery.
- The bank credited $20 of interest earned.
- The bank charged a $35 monthly service fee.
- A $460 check from a customer was returned NSF.
- Check #409 for the utility bill was written for $382 but recorded in the books as $328.
The reconciliation
| Bank side | $ | Book side | $ |
|---|---|---|---|
| Balance per bank | 8,420 | Balance per books | 7,444 |
| Add: deposit in transit | 1,250 | Add: note collected by bank | 1,000 |
| Less: outstanding checks (640 + 1,115) | (1,755) | Add: interest earned | 20 |
| Less: service charge | (35) | ||
| Less: NSF check | (460) | ||
| Less: error on check #409 (382 − 328) | (54) | ||
| Adjusted cash balance | 7,915 | Adjusted cash balance | 7,915 |
Both sides arrive at $7,915. That is the figure that goes on the balance sheet.
The journal entries
Five book-side items, so five entries (or one compound entry):
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,000 | |
| Notes Receivable | 1,000 | |
| Cash | 20 | |
| Interest Revenue | 20 | |
| Bank Service Charge Expense | 35 | |
| Cash | 35 | |
| Accounts Receivable | 460 | |
| Cash | 460 | |
| Utilities Expense | 54 | |
| Cash | 54 |
After posting these, the Cash account reads $7,444 + 1,000 + 20 − 35 − 460 − 54 = $7,915, which agrees with the reconciliation.
Two of these entries deserve a second look. The NSF check goes back to Accounts Receivable, not to an expense: the customer still owes the money. The company has simply lost the cash it thought it had collected. And the $54 utilities error is a transposition (328 vs 382). A difference that divides evenly by 9 is the classic sign of one, a trick covered in our guide to a trial balance that will not balance.
Common bank reconciliation mistakes
- Journalizing bank-side items. A deposit in transit or an outstanding check needs no entry. The company already recorded it, and the bank will catch up.
- Getting the sign of a book error backwards. Ask what the books should show. A $382 payment recorded as $328 means too little was deducted, so Cash must fall by another $54.
- Treating an NSF check as a bad debt. It becomes a receivable again. Write it off only if the customer later fails to pay.
- Listing old outstanding checks that have since cleared. Compare last month's outstanding list against this month's statement before carrying any check forward.
- Stopping when the two sides agree. Agreement is the check. The marks are in the journal entries and the adjusted balance on the balance sheet.
Practice Problem
The bank statement shows $5,600 and the ledger shows $5,585. There is a $900 deposit in transit and $1,340 of outstanding checks. The statement shows a $25 service charge and a $310 NSF check from a customer. A $1,560 collection from a customer was recorded in the books as $1,650. Find the adjusted cash balance and the entries required.
Answer: Bank side: 5,600 + 900 − 1,340 = $5,160. Book side: 5,585 − 25 − 310 − 90 = $5,160. Entries: Dr Bank Service Charge Expense 25 / Cr Cash 25; Dr Accounts Receivable 310 / Cr Cash 310; Dr Accounts Receivable 90 / Cr Cash 90. The last entry corrects the overstated collection: the customer still owes the $90 that was never received.
Bank reconciliations are an internal control as much as a calculation. They catch errors and theft that no other routine check would. Practice them on Accountely's bank reconciliation challenges, then see how they fit with the other cash controls. Each challenge gives line-by-line feedback, so you can see which side you placed each item on.
Frequently Asked Questions
What items go on the bank side of a bank reconciliation?
Items the company has recorded but the bank has not yet processed: deposits in transit are added to the bank balance, and outstanding checks are deducted. Bank errors are also corrected on the bank side.
What items go on the book side?
Items the bank has recorded but the company has not: bank service charges, interest earned, collections made by the bank, NSF (bounced) checks and electronic payments. Errors in the company's own records are corrected here too.
Which bank reconciliation items need journal entries?
Only the book-side items. Bank-side items such as outstanding checks and deposits in transit are already in the company's records; they will clear the bank on their own and need no entry.
What is a deposit in transit?
Cash the company has recorded and deposited, usually at the end of the month, that the bank had not yet credited when the statement was prepared. It is added to the bank statement balance.