Numerous items will require an adjustment to the balance shown in bank statement. These include deposits in transit, outstanding checks and errors made by bank. In the case of each of these items, an adjustment must be made to bring the bank balance to the true balance. However, none of these items will require an entry in the books of the depositor. With the exception of errors, in due time, the bank will receive notice of the reconciling items in the normal course of business.
Deposits in transit are deposits that were made in the time period being accounted for, but for some reason the bank did not record. This is usually the result of a deposit made late in the day or in the mail. This amount will be added to the balance per bank.
Outstanding checks are checks that have been written, but have not cleared the bank as of the date of the bank statement. This is usually the largest part of a bank reconciliation. These amounts must be subtracted from the balance per bank to arrive at the true cash amount.
Outstanding checks should be watched carefully. A continuing large amount of checks outstanding may indicate a problem in control of cash. As a good practice, all checks over six months old should be canceled and reissued. This happens when a check is lost, accidentally torn up, and for other such reasons.
Errors by the bank typically involve a problem with incorrectly recorded numbers or names. A deposit or check may be encoded incorrectly by the proof operator.
For example, if the customer number is incorrectly recorded, this will cause a deposit to be put into the wrong person’s account. Both accounts (the one the check did go into and the one it was supposed to go into) are now incorrect. The account that erroneously received the deposit should subtract it from the balance per bank. The account that did not receive the expected deposit will need to add that amount to the balance per bank.
Should the error be in the encoding of the amount of a check, again the balance per bank will need to be adjusted accordingly. For example, if a check from $33.50 was encoded by the bank in the amount of $35.30, the bank will show a balance that is understated by the differences, $35.30 – $33.50, or $1.80. Again, this will require the depositor to notify the bank of the error and to note the error in the reconciliation of the bank account. No entry is required in the books of the depositor.