Errors can occur in both the bank’s and the depositor’s recordkeeping systems. The bank reconciliation process should discover these mistakes. Service charges may be levied by the bank for regular or special services. They often appear as a reconciling item because banks notify customers of the amount only through the statement.
The four basic steps in the bank reconciliation process are:
1. Identification of items in transit
The first step involves identifying those deposits and checks (cheques) that the bank had not processed at the statement date. Any other items (such as NSF checks or collected notes) on the statement should be identified. The accountant would also look to see if prior notification had been received and the event properly recorded. If an entry has not been recorded, the item will appear on the reconciliation.
2. Identification of service charges
A notation should be made of unrecorded service charges.
3. Preparation of the reconciliation
A typical reconciliation consists of two sections: one reconciles the bank balance to the correct balance as of the desired date, while the other reconciles the book balance to the same number. The bank section lists items in transit from the depositor to the bank and bank errors. The book section lists items in transit from the bank, service charges, and depositor errors.
4. Further action
If the bank has made an error, it should be notified promptly. No entry would be made for these errors. For any reconciling items appearing in the book section, a journal entry should be recorded to adjust the cash account to the correct balance.
Upon receipt of the bank statement dated December 31, 20×1, for the checking account in the First National Bank, the accountant for the Sample Company began the reconciliation process. The deposit slips and canceled checks (cheques) were compared with the records. These results were found:
The reconciliation prepared by the accountant appears in below example.
The next step would be to contact the bank and notify it of the error on the deposit. An inquiry should also be made concerning the lack of notification about the NSF check Then, a journal entry would be made to record the reconciling items from the book section. It would take on this form:
After it is posted, the balance in the Cash account for December 31 would be $11,401.
The items in the bank section show that the bank’s version does not agree with the books because a deposit had not been processed and checks had not yet been canceled. If the deposit was made toward the end of the month, there would be no need to notify the bank. On the other hand, if the deposit was made earlier, it would be essential to determine why it had not been received. The accountant should review the outstanding checks with the intent of investigating any extremely old ones.
For example, the payees may be contacted to determine if checks have been misplaced. The $10,000 error is added because it understated the deposit and the account balance. The items shown in the book section arise from the previously unknown events. For some reason, Sample had not been notified of the NSF check. The usual procedure calls for the bank to send the depositor not only the notification but also the check itself. Because the notification had not been received, it was necessary to put this item on the reconciliation. The signer of the check still owes the $2,300.
The error on the check has two effects. First, the balance of the Cash account was reduced by $300 instead of only the $30 that was mistakenly written on the check. Second, the supplier’s account payable was reduced by $300 when the payment was $270 smaller. The service charge is deducted on the reconciliation because we had not been notified of its amount prior to receiving the statement. Typically, each bank account is represented by a separate general ledger account. A reconciliation of this type would be prepared for each bank account and the cash records for that account.