There are usually reconciling items discovered after a bank reconciliation report is prepared regularly in the ensuing month, which may or may not need journal entries to correct the cash in bank balance in an accounting record. The reconciling items that need adjustments are often the book reconciling items, which usually include book errors, unrecorded transactions, and debit and credit memos. There are different journal entries for bank reconciliation, but these ten (10) Journal entry examples should help.
The ten accounting bank reconciliation journal entries are:
1. Unrecorded interest income from a bank statement balance
A deposit usually earns an interest income by saving money in a bank for a month, a year, or more than a year.
An interest received, although the amount is small, depending on a prevailing interest rate in a market, often causes a reconciling item in a book, as shown in a bank reconciliation report.
A journal entry is made to record an unrecorded interest income in the correct general ledger by debit to a Cash in Bank account and a credit to an interest income account in the income statement.
- Debit: Cash in the bank
- Credit: interest income
The cash account and its GL balance are increased with this entry and the understatement of both accounts is corrected in the financial records.
2. An unrecorded deposit as found in the bank record
An unrecorded deposit is a deposit made by an entity or by its customers, which is not recorded in the entity’s cash book, resulting in a reconciling item to be reported in the bank reconciliation statement.
This usually arises when a customer failed to give information about a cash deposit made for payment of dues to an entity that understates a book, particularly a cash balance. Hence, a journal entry is prepared to increase a Cash in Bank account and a related credit account in the depositor’s book.
- Debit: Cash in the Bank
- Credit: Income account/Accounts Receivables
Cash receipts increase the cash in bank and revenue accounts while decreasing the receivable accounts.
3. Error in recording a deposit
Sometimes, there is an error in recording a deposit found after the preparation of a bank reconciliation, which requires a journal entry to correct an erroneous accounting entry.
Moreover, an example would be differences in the amount recorded between the accounting record and the bank’s record.
Sometimes, a financial transaction was erroneously recorded in another Cash in Bank account, because of incorrect information submitted to a bookkeeper or an accountant.
There are many reasons which could not be avoided, and a journal entry is necessary to correct the error which depends on the type of transaction.
4. Unrecorded check
An unrecorded check is an issuance of a check not recorded in a cash book because of an error, a mistake, or an intention.
It becomes part of reconciling items in the book, requiring a journal entry to correct a balance of a Cash in Bank account.
- Debit: Asset/Expense Account based on cash disbursement type
- Credit: Cash in Bank
5. Unrecorded online transfer
An online cash transfer is often unrecorded because of the simplicity of doing online transactions, a service provided by a depository bank to its clients.
Without preparation of bank reconciliation, this transaction may not be identified because of its number of occurrences within a month or it might not be actually allowed by management.
An unauthorized transaction made online should be scrutinized for the possible malicious acts of an employee, supervisor, or officer that may cause losses to a company.
A journal entry is then prepared to set up a receivable from the aforesaid employee to establish obligations because of non-adherence to company rules and regulations.
6. Unrecorded debit memos
Some financial transactions require payments to a bank for serving its clients, and these are debited in the depositor’s account, referred to as a debit memo or bank adjustment.
A debit memo notifies a client of a deduction made to their account for a bank fee, bank error, bank charge, and erroneous credits.
For example, bank fees may include check printings, fund transfer fees, billings, opening account fees, and deposit fees.
- Debit: Bank charges
- Credit: Cash in the Bank
7. Error in recording cash disbursements
A disbursement might be recorded in a book with a different amount because of an oversight and also because of several transactions processed within a month. This is common in an established company with several clients with transactions exceeding 2,000 per month.
8. Reclassify stale checks to payable
A check becomes stale if still uncleared beyond six months in a bank, perhaps for a different reason.
For example, a client may have lost a check without informing a company, hence, there was no replacement made, which remains as an outstanding check. Thus, a journal entry is necessary to reclassify the transaction from a cash disbursement to an obligation, increasing a payable account and a Cash in Bank account.
- Debit: Cash in the bank
- Credit: Accounts Payable
9. Not Sufficient funds
A check receipt may be rejected and not credited in a depositor’s account because of an insufficient fund or no available balance from the sending bank account.
When a bank received a check deposit, a credit to the client’s account is usually made, but when the account from which the check was drawn is insufficient, a debit to the aforesaid account is also done.
This informs the client that a deposit failed and an adjusting entry must be prepared in the depositor’s book because the deposit was reversed.
- Debit: Accounts Receivables/Notes receivable
- Credit: Cash in the bank
Uncleared checks overstate the cash balance and revenue, but also understate receivables.
10. Unrecorded fund transfers
Normally, a fund transfer within the bank accounts of a company is not usually recorded in an incorrect account, but sometimes, because of an oversight, an error may take place even with a thorough review.