Watch 5-minute video which discuss the use of bank reconciliations to control cash.

The cash balance shown by a bank statement is usually different from the company’s cash balance. Differences between the company balance and bank balance may arise because of the following:

A delay by either the company or bank in recording transactions
The bank has debited or credited the company’s account for transactions that the company will not know about until the bank statement is received
Errors, such as an incorrect posting, made by either the company or the bank

Bank Reconciliation

A bank reconciliation is an analysis of the items and amounts creating the difference between the cash balance reported in the bank statement and the balance of the cash account in the ledger. The Adjusted Cash Balance determined in the bank reconciliation is reported on the balance sheet and reflects the actual amount of cash the company had as of a specific date.

A bank reconciliation is usually divided into Bank Section and the Company Section.

The Bank Section begins with the cash balance according to the bank statement and ends with the Adjusted Cash Balance. Adjustments are in the middle which include:

Add deposits not recorded by bank (deposits in transit)
Deduct outstanding checks not paid by bank
Add or deduct for errors made by the bank

The Company Section begins with the cash balance according to the company’s records (the cash account in the ledger) and ends with the Adjusted Cash Balance. Adjustments are in the middle which include:

Add credit memos that have not been recorded (notes collected by bank)
Deduct debit memos that have not been recorded (NSF checks, service charges)
Add or deduct for errors made by the company's accounting department

The adjusted cash balance from bank and company sections must be equal and reflect the correct amount of cash as of the reconciliation date.

Very Important: After you complete the bank reconciliation, you will need to make journal entries for adjustments which you made on the book side. You need to follow the journal entries illustrated in the textbook on page 353 and not follow the way they illustrated these journal entries in the TMM Videos. In substance, they are the same, however, Cengage has been programmed to accept the two journal entries illustrated in the textbook only.