Background

• A company's cash general ledger account reflects its bank checking account. During the course of the company's operation over a month, the cash account is affected by transactions, such as checks written and receipts from customers; as soon as a transaction occurs, the company immediately posts it to the cash account. At the same time, the bank maintains a record of the company's checking account, regularly updating the amount each time the account is affected by checks, deposits and bank service charges. At the end of each month, the bank issues a statement to the business, amounts which are then reconciled to those in the company's records.
  
  

Deposits in Transit

• One of the most common reasons a bank statement almost never agrees with the company's books is deposits in transit. Companies make frequent deposits to their checking accounts which are immediately recorded in their books but may not appear in the bank statements. For example, if a company deposited a check for $100 on the last day of April, the amount will not appear on the statement issued by the bank for April because deposits by check usually take two to three days to clear.
  
  

Outstanding Checks

• Another source of discrepancies is outstanding checks. For example, when a company makes a payment to its supplier by writing a $200 check, it deducts the amount from its cash account right away. However, as the check may take several days to reach the recipient by mail, and then be deposited and cleared, the company's bank account will overstate the actual cash balance by $200. Checks written at the end of the month are updated in the company's books right away but do not appear in the bank statement because the check has not been cleared.
  
  

Bank Reconciliation Statement

• Reconciling the bank statement starts with verifying that the amounts listed on it are consistent with the company's cash account in its general ledger. This process confirms the amounts and lets the relevant company department know that the cash reported by the bank is consistent with the company's books. The company generates a bank reconciliation statement and consolidates the discrepancy in the two amounts by adding or subtracting those figures from the statement.
  
  

Reconciling Process

• In the above examples, the bank statement understated the amount by $100 due to the deposit in transit and overstated the amount by $200 due to outstanding checks. In reconciling, $100 is added to the balance on the bank statement, and $200 is subtracted. Once all amounts for deposits in transit and outstanding checks are addressed, the ending balance on both the bank statement and company's books are matched.