Bank Reconciliations
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
A company's own cash ledger and its bank statement almost never agree on the same day. A bank reconciliation is just the process of figuring out why — and FAR expects you to know which side of the gap gets fixed.
What's the point of a bank reconciliation?
It explains the difference between the bank balance and the book balance for cash. That gap exists because some transactions hit the books before the bank knows about them, and others hit the bank before the books know about them.
The one question that solves every reconciling item: "Does the bank know about this yet, or do the books know about this yet?" Whichever side is missing the information is the side you adjust.
Which items does the bank not know about yet?
These are already recorded in the books, but the bank hasn't caught up. They adjust the bank balance, not the books.
- Outstanding checks. The company already wrote and recorded the check, decreasing its book balance. The check just hasn't cleared the bank yet, so the bank balance is still overstated relative to the true cash figure — subtract it from the bank balance.
- Deposits in transit. The company already sent the deposit and recorded the increase in its books. The bank hasn't processed it yet, so the bank balance understates true cash — add it to the bank balance.
Which items do the books not know about yet?
These are already reflected in the bank statement, but the company hasn't recorded them. They adjust the book balance.
- Bank service charges. The bank deducted a fee (say, a $12 monthly charge) that the books have no entry for. Subtract it from the book balance.
- Bank credits. Interest income or cashback rewards the bank added to the account. The books don't have an entry yet, so add it to the book balance.
- NSF checks. A customer's check that the company deposited — and recorded as a cash increase — but the customer's bank returned it for insufficient funds. The bank already backed the deposit out of the account, but the books still show the original increase. Subtract it from the book balance to reverse that increase.
- Errors. Say the company recorded an outstanding check as $150 when it actually cleared for $105. The books decreased cash by $45 too much. Add the $45 back to the book balance to correct it.
Book side: book balance + bank credits − bank fees − NSF checks ± book errors = adjusted balance
Both sides should land on the same adjusted balance — that number is the true cash figure reported on the balance sheet.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
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