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What Is a Bank Reconciliation?

Finance
Article
07/22/2015

A bank reconciliation is a schedule that illustrates the differences between the balance on the statement provided by the bank and the balance on the books of the organization at the end of a given period. Most bank statements are issued on a monthly basis; however, this can be complicated by the fact that the bank statement date may not coincide with the end of the period for the organization. For example, the bank may issue a monthly statement each month on the 20th, but companies typically close their accounting books on the last day of each month. Even if the bank statement does coincide with the accounting period end, there will be items that cause differences in the balances. These are referred to as reconciling items.

Here are some other terms related to bank reconciliation that you should know:

Reconciling items are the reasons the bank and book balances differ and also may be used to make corrections to any errors in the book balance.

Deposits in transit are deposits that were made after the bank statement was issued, but have been recorded on the books.

Outstanding checks are checks that have been written and recorded on the books, but have not yet been cashed or have not cleared the bank.

NSF (non-sufficient funds) checks are those that were deposited to the bank, but subsequently were returned to the bank for nonpayment. The bank may have originally credited the customers account for checks included in a deposit. When the check is not honored, the bank notifies the customer and reduces the bank balance.

Bank fees are charges the that show up on the bank statement and will need to be adjusted for in the business books.

Interest Income is an increase in the bank balance for any interest earned on the account.

Errors can be made either by the bank or the customer.

Some reconciling items require adjustments to the book balance with an actual entry and some do not. Those that do not require adjustments are simply listed on the bank reconciliation and will be removed from the next month's reconciliation because they are really timing differences.

Items that do not require adjustments:

  • Deposits in transit
  • Outstanding checks
  • Bank errors

Items requiring adjustments:

  • Interest income
  • Bank fees
  • NSF checks
  • Book errors

Bank Reconciliation Steps

Step 1

Review the prior month's bank reconciliation looking for any outstanding checks or deposits in transit that are now included in the current bank statement. Any outstanding checks that have still not cleared the bank will need to remain on the outstanding check list portion of the bank reconciliation. Any deposits in transit that do not appear on the bank statement will remain reconciling items, but will need to be researched with the bank.

Step 2

Identify any current outstanding checks by comparing all checks that appear on the bank statement against the checks issued and recorded on the company's books. Add any newly issued checks since the last statement that have not yet cleared the bank.

Step 3

Identify any current deposits in transit by comparing the deposits on the current bank statement to deposits recorded on the books.

Step 4

Review the bank statement for any new debits or credits such as NSF debits, bank fees, etc.

Step 5

Prepare the reconciliation.

Step 6

Make the necessary adjustments to the books.

 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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