Reconcile Differences Between Bank Statements and Business Cash Balance

A pen on top of a bank statement.

Does your bank statement accurately report your businesses cash balance? Probably not! There is usually a difference in the amount of cash reported on the balance sheet, and the actual balance in the bank account for the same period. This difference is neither a good nor bad thing, but instead, highlights the timing difference between when the business remits payments and when they clear the bank.

Reconciling the bank account regularly serves two purposes. The first is it provides the user with an accurate cash balance at the end of the period, preventing overdrafts on the account and having stale outstanding checks. The second is to ensure that all transactions that cleared the bank account are recorded in the general ledger. For example, wire and ACH receipts, or receipts going directly to a lockbox that is deposited into the bank account, but that the business might not physically see.

While most accounting software will assist the user in reconciling the bank statement, it is essential to be able to understand the bank reconciliation and complete it manually if necessary. Begin by taking the bank balance at the beginning of the period being reconciled, and add all deposits that have cleared the bank, and subtract all the payments. When these three ‘items’ are added together, the sum should match the bank balance at the end of the period. Some deposits made closer to the end of the period might not clear the bank and will remain outstanding; these should be added to the overall bank balance at the end of the period. Likewise, not all payments, especially checks issued at the end of the period, might not clear the bank and will reduce the cash balance for the period; as a result, all outstanding payments need to reduce the bank balance at the end of the period. The ending total represents the actual amount of cash available in the bank account. If all transactions are correctly recorded, and the account is reconciled appropriately, the reconciled cash balance should match the amount of cash reported in the general ledger.

If performing the bank reconciliation in an accounting software, begin the bank reconciliation by entering the bank balance at the end of the period, as well as the period end date. Next, select all deposits and withdrawals reflected on the bank statement. Record any transactions that appear on the statement but are missing in the accounting software. The difference between the reconciled bank balance and the balance on the statement should be zero; do not finalize the reconciliation until the difference is eliminated. This difference between the reconciled account balance and bank statement shows either transactions did not clear the bank account but were marked as cleared, or vice versa cleared transactions were not checked off. If such a difference exists, compare the marked transactions in the reconciliation to the bank statement. It is a good practice to record bank transactions and check them off on the reconciliation the same way as they appear on the bank statement.

As you reconcile the account keep an eye out for old payables that have not cleared the bank account. Follow up with the recipients, and either reissue the payment or cancel the payment and reverse the payable and expense. Also, deposits that bounce and do not clear the bank should be reversed in the GL with the cash account credited for the amount of the original deposit.

If you would like to learn more about reconciling your bank accounts or need further assistance reconciling bank accounts and resolving reconciliation discrepancies, contact Halt Buzas and Powell at (703) 836–1350 or send us a message.

 

Written by Robert Roudik, CPA, CFE