Today, you’ll learn bank reconciliation adjusting/Journal entry examples.
Written By Kevin Mil - Author/Founder
After preparing the bank reconciliation statement or report, the next step is to focus on making any necessary adjustments.
In this tutorial, you will learn about the common adjusting entries required after completing your report.
Purpose in Bank Reconciliation
The purpose of adjusting entries in bank reconciliation is to correct the depositor’s Cash in Bank records.
For example, if there are unrecorded deposits, the accountant can record them in the books.
These can include unrecorded interests, deposits, and fund transfers.
Another purpose of adjusting entries is to establish accountabilities.
For instance, if a check is returned, an adjusting entry can be made to set up a receivable from a client.
There are many other purposes for adjusting entries, which we will discuss in detail.
What are adjusting/journal entries in bank reconciliation?
Bank reconciliation adjusting entries are accounting journal entries made to align the book balance of a company’s cash account with the balance shown on the bank statement.
These entries address discrepancies that may arise due to timing differences or errors.
Here are the adjusting entry examples for bank reconciliation:
1. Bank Charges
In the bank reconciliation statement, you’ll often find bank charges, which are discovered while reconciling your bank accounts.
These charges typically appear on the debit side of the bank statement, reducing the bank balance.
However, they are usually unrecorded in the company’s books until the bank statement is received.
Since they are unrecorded, an adjusting entry is necessary to account for these charges and ensure the financial records are accurate.
Debit: Bank Charges
Credit: Cash in Bank
2. Interest Income
The average daily balance of deposits in a bank and investments may earn interest, which is credited by the bank monthly.
This interest appears on the credit side of the bank statement.
However, unless the depositor has received the bank statement, these amounts remain unrecorded in the depositor’s Cash in Bank account.
Therefore, the entry to record the interest income is shown below.
Debit: Cash in Bank
Credit: Interest Income
3. NSF Checks
When clients pay by check, the depositor must deposit these checks at the bank, which typically clears them within two to three days.
However, if a check is marked as non-sufficient funds (NSF), the bank will record the deposit on the credit side of the bank statement but also record it on the debit side, indicating the check has bounced.
Since the depositor has already recorded the deposit in the Cash in Bank account, increasing the balance, an adjusting entry is required.
The entry is shown below:
Debit: Accounts Receivable
Credit: Cash in Bank
4. Accounting Errors
Recording bank transactions in the Cash in Bank account can be prone to errors, especially when dealing with thousands of transactions.
Therefore, adjusting entries should be made to account for any discrepancies, whether they are understatements or overstatements.
The necessary entries are detailed below.
Understated
Debit: Cash in Bank
Credit: Related Account(s)
Overstated
Debit: Related Account(s)
Credit: Cash in Bank
5. Debit Memo
There are many reasons why a bank might issue debit memos, including service charges, NSF fees, loan payments, and error corrections.
Given the variety of reasons, it is important to remember that a debit memo decreases the depositor’s bank balance.
Consequently, the entry is shown below.
Debit: Related Account(s)
Credit: Cash in Bank
6. Credit Memo
A credit memo increases the bank balance of a depositor.
This increase is reflected in the entry shown below.
Debit: Cash in Bank
Credit: Interest income
7. Unrecorded Transactions
Now let’s address the unrecorded bank transactions, which typically pertain to receipts and disbursements.
When dealing with receipts, it’s common to encounter situations where specific details are lacking.
In such cases, I usually record the receipt under other payables, until identified.
Conversely, for unrecorded receipts with available information, we should record them with the corresponding related account.
Receipts with info
Debit: Cash in Bank
Credit: Sales
Receipts without info
Debit: Cash in Bank
Credit: Other Payables
Regarding unrecorded disbursements, we need to determine whether each disbursement is authorized.
If the unrecorded disbursement identified during the bank reconciliation is authorized, there is no issue, as it will have an approved voucher with supporting documents.
In this case, we record it as usual.
Conversely, if the unrecorded disbursement is unauthorized, we must establish accountability.
We address this by recording it through the receivable account.
Authorized
Debit: Relative Account(s)
Credit: Cash in Bank
Unauthorized
Debit: Due from Officers and Employees
Credit: Cash in Bank
8. Loan Payments
Wondering how to handle those pesky loan payments in your bank reconciliation?
No worries, we’ve got you covered with some real-life examples to keep your books in tip-top shape.
Let’s say your company made a loan payment of $1,000, but $100 of that was interest expense.
To reconcile this on your books, you’ll need to:
- Debit Interest Expense for $100
- Credit Cash for $1,000
Now, what about the rest of that loan payment?
The $900 that went toward principal needs to be recorded too:
- Debit Notes Payable for $900
- Credit Cash for $900
Boom!
Your loan balance is now up-to-date and ties out with your bank
Creating Adjusting Journal entries
When creating journal entries for bank reconciliation, it is crucial to account for the reason behind each adjustment.
Properly describe this reason in the Particular section of the Journal Entry.
Additionally, include the dates, the amounts, the preparer’s name, and the approver’s name for the Adjusting Journal Entry.
This practice ensures that all relevant details are documented, as it is common for accountants to forget to record these entries.
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