The adjusted method of bank reconciliation differs from the other two methods because it accurately reflects a company’s or organization’s true cash balance.
It is considered the standard report for reconciling bank transactions, making it invaluable for accountants and auditors.
This method helps detect errors and unrecorded transactions during a given period, ensuring the accuracy of financial records.
In this tutorial, we’ll focus on what is most useful, as the other two concepts are not typically used in real companies.
Therefore, I will not discuss them further.
Written By Kevin Mil - Author/Founder
What is adjusted cash balance in bank reconciliation?
The adjusted balance method of bank reconciliation calculates both the adjusted book and bank balance.
The goal is to determine the depositor’s real cash in bank balance.
This method shows the available funds for business operations.
It includes the reconciling items, which are the unrecorded and unresolved discrepancies for the bank reconciliation period.
These items need to be addressed to accurately reflect the cash position.
Usually Required by Auditors
Most regulators, such as the SEC, require a Certified Public Accountant to issue an opinion on the fairness of the presentation of financial statements before they are received.
The auditor must also audit the financial statements before issuing an opinion through an audit certificate.
This tutorial will cover the adjusted method of bank reconciliation, which is an essential report that auditors require.
It’s important to understand why this report is crucial, as a bank reconciliation is necessary for each bank account.
The adjusted method reveals discrepancies between the depositor’s records and the bank’s records, as presented in the bank statement.
It also identifies errors in recording and highlights unrecorded transactions.
An auditor requires a bank reconciliation statement during their audit because it provides crucial information about the accuracy of the financial records.
However, they will not rely solely on the report.
Auditors need to verify the information presented by conducting their own audit procedures, and in some cases, they may even redo the bank reconciliation to ensure its accuracy.
Unadjusted Balances
The bank reconciliation process begins with the unadjusted balances, which include the book balance and the bank balance.
These balances represent the remaining cash amounts at the end of the month.
During the preparation of the bank reconciliation statement, we add or deduct from these balances based on any discrepancies noted.
Let see an Example:
Once the bank reconciliation is completed, the adjusted balances of both the book and the bank should be equal, as shown in the example where both balances are $108,500.
This equality is achieved by carefully considering the reconciling items, which account for any discrepancies between the bank statement and the company’s records.
Ensuring these balances match is crucial for accurate financial reporting and helps to identify any errors or irregularities in the accounting process.
Added to the Unadjusted Book Balance
In the example provided, the reconciling items for the book typically include interest income, unrecorded deposits, and credit memos.
Additionally, it is essential to account for any errors in recording, whether by adding or deducting these discrepancies.
However, errors from the recording have not been included in the example above.
Added to the Unadjusted Bank Balance
In the example above, the reconciling items for the unadjusted bank balance are deposits in transit and outstanding checks.
This is because banks rarely commit mistakes; however, if errors do occur, they should also be included in the reconciling items.
True Cash in Bank Balance
Returning to the previous example, the true cash balance of XYZ Inc.
is $108,500.00.
Ideally, this amount should also match the balance in the Cash in Bank account.
However, if the book reconciling items have not yet been adjusted in the books, the balances may differ.
Typically, these reconciling items are adjusted in the following month, as the organization receives the bank statement in the subsequent month.
Deposits in Transits and Outstanding Checks
When preparing or auditing a bank reconciliation statement, there are specific items that need careful attention.
These include deposits in transit and outstanding checks, which are crucial bank reconciling items.
If a deposit in transit does not clear within two months, it indicates that something might be wrong.
Conversely, if outstanding checks become stale, they should be removed from the list of outstanding checks through an adjusting entry.