Bank reconciliation is a term used when settling differences contained in the bank statement and the cash account in the books of the bank’s customer. The ending balances will rarely agree. To reflect the reconciling items, a bank reconciliation is required. Once completed, the adjusted bank balance must prove to the adjusted book balance. When it does, it indicates that both records are correct. Journal entries are then prepared to update the records and to arrive at an ending balance in the cash account that agrees with the ending balance in the bank statement.
Usually the major amount of the cash assets of a firm is in the form of deposits with banks or other financial institutions. Realize that a debit (asset) to the bank is a credit (liability) to you. Likewise, when the bank says a credit, this will be a debit on the firm’s books. This reversal in accounting terms that occurs when dealing with bank accounts often causes problems.
When doing bank reconciliations, the best procedure is to work to the true cash balance. This will require certain adjustments to be made to the balance shown in the bank statement. There will also be some adjustments that must be made on the books of the depositor.
Therefore, the bank balance is adjusted for items reflected on the books that are not on the statement. They include outstanding checks, deposits in transit and bank errors in charging or crediting the company’s account. The book balance is adjusted for items shown on the bank statement that are not reflected on the books. They include bank charges, not sufficient funds checks, collections made by bank on the customer’s behalf (eg collected notes receivable), interest earned and errors on the books.