5 Ways a Bank Reconciliation Affects Balance Sheet

Today, you’ll learn does bank reconciliation affects the balance sheets.

A bank reconciliation affects a balance sheet through its reconciling items. If the reconciling items are not recorded in the depositor’s record, the cash balance in the balance sheet is either understated or overstated. For example, the unrecorded cash deposits cause the total assets in the balance sheet to be understated.

When the assets in the balance sheet are understated, the financial report could not be relied upon. For example, unrecorded deposits should increase the cash balance of the balance sheet. It happens when customers did not give information about their cash deposits. Furthermore, interest income may not be reflected in the cash balance on the balance sheet. An understated balance sheet means the financial statement is unreliable.

A bank reconciliation statement is usually prepared before a balance sheet is finalized. It assists in the preparation of a reliable financial statement. It also validates the cash balance in the balance sheet.

The adjusted balance in the bank reconciliation statement also affects the cash balance in the balance sheet. If the difference between the two reports is material, the reconciling items in the bank reconciliation statement may require adjustments in the accounting record. Those can be unrecorded deposits and disbursements. Also, the difference may misstate the cash balance. Those can be unauthorized check issuances or undeposited collections. The total adjusted cash balance of all bank reconciliations should equal the cash balance in the balance.

Here are the most common reconciling items in the bank reconciliation statement that affects the balance sheet.

1. Unrecorded Deposits understate the balance sheet and unrecorded withdrawals overstate it.

All unrecorded deposits in the bank reconciliation statement understate the cash balance in the balance sheet. The correct adjusting entry would be debit to cash and credit to the relative account. The credit could be either an asset account, liability account, or nominal account. Both asset and liability accounts are part of the balance sheet, however, the nominal account is usually reported in the income statement.


Conversely, unrecorded withdrawals are deducted from the cash balance in the balance sheet. Sometimes, unrecorded withdrawals found in the bank reconciliation may be unauthorized disbursements and investigation may be required.

Overall, all unrecorded deposits and withdrawals require adjustment of the cash balance in the balance sheet.

2. Unrecorded interest and bank charges.

Interest income usually appears in a bank statement monthly, quarterly, or yearly. Cash and time deposits in a bank may accrue a depositor’s interest income and these cash inflows or transactions are usually recorded in the book after a bank reconciliation is prepared.

Thus, the inflows require adjustment to the cash balance in the balance sheet.

3. Unauthorized cash transactions affect the reliability of the financial statement (Balance Sheet)

The main purpose of a bank reconciliation is the detection of fraud. The cash balance in the balance sheet may appear reliable but most of the time it is not. Hence, the cash balance requires supporting documentation through account reconciliation with the bank balance.

Without a bank reconciliation, unauthorized transactions are not detected and loss of money may file up.

The unauthorized transactions require adjusting entry to the cash balance in the balance sheet. For example, a debit to account receivable from officers and employees and a credit to the bank balance. Hence, unauthorized transactions decrease the cash balance.

4. Stale checks overstate the cash balance

The balance sheet is also affected by uncleared outstanding checks of the bank reconciliation statement. For instance, when the checks are over six months, they are not outstanding anymore. They are debited back to cash and credited to accounts payable. Also, outstanding checks are corrected when they are recorded in other bank accounts. Thus, outstanding checks can really affect the accounts of the balance sheet.

The total assets and total liabilities in the balance sheet are usually understated with stale checks.

There are several reasons a check does not clear in a bank. First, the check had been lost. Second, the check does clear, however, the bank did not debit it in the bank statement, a bank error. Third, the check may have been unclaimed.

A lost check is usually the primary cause of a stale check. The payee may have also forgotten and failed to contact the issuer when the check was lost. It is common among individuals and less common among businesses.

Sometimes the payees did not claim the checks because they were not informed by the issuer, a tactic to delay payments. If the payees had not made follow-ups, they would never be informed about the issuance of checks.

5. Bank errors also affect the cash balance in the balance sheet

When a bank commits errors, it affects the cash balance in the balance sheet. For example, a cash deposit is erroneously credited to the bank account of a company. It overstates also the total assets in the balance sheet if the transaction is debited to cash. Thus, it is required to credit back the cash to correct the error.

Conversely, multiple debits in the bank statement of a single check payment also affect the cash balance in the balance sheet. The cash balance may be credited because of bank errors.

Bank errors are usually corrected in the bank account unless the errors had been recorded in the depositor’s book.

See also: Reasons a bank reconciliation should Match a Balance Sheet

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