What Do You Add and Subtract in Bank Reconciliation?

What do you add and subtract in bank reconciliation

Today, you’ll learn what do you add and subtract in bank reconciliation.

Upon completing my accounting degree, I believed I had a solid grasp of bank reconciliation.

Eager to put my knowledge into practice, I applied for a position at a small bank.

Surprisingly, the assessment focused solely on bank reconciliation.

It marked my first encounter with the process in a real-world scenario.

Regrettably, I didn’t perform well on the exam, but the experience proved invaluable.

I used the setback as a learning opportunity and dedicated myself to mastering bank reconciliation.

This newfound expertise eventually played a crucial role when I secured a job in the field.

When you’re tackling bank reconciliation for a company, it’s likely that you’ll opt for the adjusted method.

This method has specific rules to guide you.

If it’s your first time diving into bank reconciliation, it’s crucial to grasp the concept of reconciling items for both the bank and the books.

Let’s start by discussing bank reconciling items, and whether to add or deduct them.

Bank Reconciling items:

Add: deposits in transit

Alright, so when we’re diving into bank reconciliation, we kick off with the unadjusted bank balance.

Now, one thing we add into the balance is deposits in transit.

These are basically deposits that the company has noted down in its cash book but haven’t quite made it through the bank’s processing hoops yet.

Deduct: Outstanding Checks

Moving on, we deduct out outstanding checks from the unadjusted bank balance.

These checks are the ones the company has cut for payments but haven’t been cashed or processed by the bank yet.

Outstanding checks simply mean that the payees haven’t taken the checks to the bank for cashing, and the reasons for this delay are unknown.

Add or Deduct: Bank Errors

We adjust the unadjusted bank balance by either adding or deducting bank errors, depending on the circumstances.

While it’s uncommon in my experience, there may be instances where a bank employee makes mistakes in recording client transactions.

Book Reconciling Items:

Let’s talk about book reconciling items. These are adjustments made to the company’s cash book.

We usually use journal entries to fix any discrepancies in the cash book.

Usually, we add or subtract book reconciling items from the unadjusted book balance.

Add: Unrecorded deposits

When we go through our company’s bank account reconciliation, we often come across deposits that haven’t been recorded in our cash book but show up in the bank statement.

To bring things in line, we include these unrecorded deposits in the unadjusted book balance.

This is done because we plan to log these transactions in the cash book later, ultimately boosting the cash balance in our records.

Deduct: Unrecorded disbursement

Next up, we subtract any unrecorded disbursements from the unadjusted book balance.

This involves deducting all the disbursements we identify in the bank statement but haven’t yet been accounted for in the company’s cash book.

Add: Interest income

Banks typically credit interest income on a monthly or quarterly basis, depending on the savings account type.

If the recorded interest income is missing from the financial records but is identified during bank reconciliation, it should be added to the cash book.

Essentially, this involves incorporating the interest income into the unadjusted book balance.

Deduct: bank charges

When we spot bank charges that haven’t made it to the cash book during bank reconciliation, we subtract them from the unadjusted book balance.

Usually, we note down these bank charges as deductions once we get debit memos from the bank.

But if those memos haven’t arrived yet, it’s likely the charges aren’t in the records, so we deduct them from the unadjusted book balance.

Add or deduct: book errors

Similar to errors that can occur in a bank’s records, your company’s bookkeeper might make mistakes when recording transactions in the cash book.

If such errors occur, they can either be added to or deducted from the unadjusted book balance.

It’s crucial to identify and rectify these errors to ensure accurate financial records.

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