Accounts Receivable Bank Reconciliation: Guide

types of errors in bank reconciliation

In this post, you’ll learn accounts receivable bank reconciliation.

Do you know that bank reconciliation affects accounts receivable?

Bank reconciliation goes beyond just managing your bank accounts; it extends its influence to various accounts on the balance sheet.

Let’s delve into its impact on accounts receivable, while acknowledging its ripple effect on payables too. Regularly performing bank reconciliations is crucial because it interlinks with multiple aspects of accounting. It’s a vital practice for maintaining accurate and comprehensive financial records.

Bank reconciliation and accounts receivable

Bank reconciliation plays a role in managing accounts receivable for businesses.

When a company receives payments from customers, the deposited funds may include items still in transit.

However, not all these funds might get credited to the bank if issues arise.

In this discussion, we’ll specifically delve into the scenario where check collections become part of deposits but face hurdles in clearing through the bank.

Imagine a customer hands over a $10,000 check to a company. In response, the company issues an official receipt. Towards the end of the month, the cashier sends this check to a nearby bank for deposit.

Now, the company’s bookkeeper updates the records by marking it as a debit to Cash in Bank and a credit to Accounts Receivable. This entry ensures the financial books accurately reflect the transaction.

As part of routine financial checks, a bank reconciliation is carried out. In this process, the transaction is categorized as a deposit in transit, acknowledging that the money is on its way to the bank.

However, things can get a bit tricky. If, for some reason, the check doesn’t clear in the bank, the next month’s bank reconciliation corrects this. The company reverses the collection entry, debiting Accounts Receivable and crediting Cash in Bank. This adjustment ensures the books accurately reflect the actual financial status.

Deposits in Transit and accounts receivables

Deposits in transit are important reconciling items that require monitoring. These items can impact the balance of the accounts receivable account.

If there are lingering deposits in transit lasting more than three days, it raises concerns. Three days is the timeframe to alert the accountant about potential issues, unless it falls on a weekend or a series of holidays, explaining delayed collections clearance at the bank.

It’s crucial to recognize that collections, particularly those from accounts receivable, should be promptly deposited in the bank.

These collections serve as the lifeblood of the company. Any delay in handling them can have significant implications for the overall operations.

Accounting entries

When there are deposits not clearing at the bank, you need to make a reversing entry. Debit the Accounts Receivable account and credit the Cash in Bank account, as discussed earlier.

  • Debit: Accounts Receivable
  • Credit: Cash in Bank

Now, let’s delve into a scenario where the delay is caused by an employee failing to deposit.

In this case, an additional entry is necessary. Debit the Due from Officers and Employees account, attributing the fault to the employee. This entry is necessary because the employee wrongly indicated that the funds had been sent to the bank, when in fact, they had not been deposited.

  • Debit: Due from Officers and Employees
  • Credit: Accounts Receivable

Best Practices

It’s crucial to address any lingering, unprocessed deposits in your bank reconciliation. Pay extra attention if these deposits are linked to accounts receivable collections. This isn’t just about balancing the books; it directly impacts the decisions made by those analyzing accounts receivables.

When you encounter these uncleared deposits, prioritize preparing journal entries.

Understand that your role in bank reconciliation isn’t just about numbers; you play a significant part in the company’s overall operations.

Don’t underestimate the ripple effect of accounting work on the broader functioning of the business. Take proactive steps to ensure accuracy and clarity in financial records, contributing to informed decision-making across the board.

Recommended actions

Please notify the Accounts Receivable supervisor if you come across any outstanding deposits in transit related to accounts receivable collections. While some might consider this beyond their duties, those who value collaboration and building relationships can benefit from going the extra mile.

As an accountant, it falls within your role to keep other departments informed. In today’s workforce, this proactive communication is not as common.

While it may not guarantee a promotion, it is a valuable way to establish connections within the organization.

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