Bank Reconciliation Journal Entries

In accounting, carrying out a bank reconciliation at the end of a financial period is very important to ensure that the financial records of a company are correct. Making the necessary bank reconciliation journal entries helps to eliminate any discrepancies between the bank statement figures and the figures on the company’s books. In this article, we will discuss the journal entries for bank reconciliations with examples.

Related: Journalizing Adjusting Entries Examples and Types

However, most of the time, the ending balance on the bank statement almost never tallies with the balance in the business’s general ledger accounts. As a result, a bank reconciliation statement is prepared by the business as a summary of the banking and business activity, comparing the balance in their own records with their bank account balance.

That is, after a business receives its bank statement, it prepares a bank reconciliation statement to identify every difference between the business’s financial records and the bank’s records. Any differences identified in a bank reconciliation are referred to as reconciling items and a bank reconciliation journal entry will be required for such items.

The ending balance in the bank statement, as well as the business’s ending balance (book balance) in the cash account for the same date, is the opening figure on a bank reconciliation statement. Here is an example of the format of a bank reconciliation statement:

As shown above, all the additions and subtractions done to the bank balance account for timing differences which help the company arrive at its target balance. The target balance is what the general ledger balance should be if the bank statement is right. Therefore, in a bank reconciliation statement, the adjusted bank balance and the adjusted book balance amounts must balance.

After preparing this statement, bank reconciliation journal entries must be done to record all the adjustments that have been made to the book balance. Hence, any of the adjustments made to increase the book balance cash will be recorded as a debit in the bank reconciliation journal entries while the adjustments made to decrease the book balance cash will be recorded as a credit.

See also: How to do adjusting entries with examples

Bank reconciliation journal entries

Journal entries based on the bank reconciliation are required for making adjustments to the balance in the book. These adjusting entries for bank reconciliation result from the reconciling items that appear on the bank statement but have not been recorded in the company’s general ledger accounts. Since the internal accounting controls in banks are extremely thorough and careful, the bank statement serves as the best external objective verification of a company’s general ledger account balance once the timing differences are taken into account.

There are several transactions carried out during the month that affects a company’s bank account balance and causes the ending balance on the bank statement to not tally with the company’s general ledger account balance.

A typical example of such a transaction is a case of bank error wherein a company has proof of making a deposit that did not get credited to its bank account. When such an error is discovered, the company has to contact the bank to get it corrected but does not have to change the already recorded deposit amount in its books.

Other examples of such transactions that require bank reconciliation journal entries include bank service charges, bank interest earned, loan payments, etc.

Reconciling items can be recorded in the books using regular journal entries or adjusting journal entries. The journal entries for bank reconciliations are made to record the reconciling items that match up the general ledger (book balance) to the adjusted bank balance. A debit entry is made to the checking account if an item is added to the book balance in a bank reconciliation because a debit will increase the asset account in the general ledger. On the other hand, if an item is subtracted, the checking account is credited.

Examples of journal entries for bank reconciliations

1. A journal entry to record bank service charges or bank fees for check printing, maintaining the account, processing wire transfers, fees for returned checks, etc.
2. Journal entry for electronic deposits and withdrawals
3. Bank interest earned journal entry
4. The journal entry to record bank collection of a company’s notes receivable
5. Bank reconciliation journal entry to record bank corrections made for a company’s errors in its deposits
6. Loan payment journal entry
7. Journal entry for not sufficient funds checks (checks that were deposited by customers but are being returned because of insufficient funds)
8. The journal entry to record deposits in transit

As seen from the list above, the journal entries for a bank reconciliation could be a result of a deposit in transit, outstanding (or returned) checks, bank charges, interest earned on bank accounts, or bank error. Let’s further discuss these journal entries for bank reconciliations and how a company records them in its books:

Bank reconciliation journal entry for deposits in transit

The majority of companies usually make frequent cash deposits on the last day of the month which may reflect in the company’s record but does not appear on its bank statement for that month. Such deposits are referred to as deposits in transit. This results in the bank statement balance understating the actual cash balance of the company.

For example, Financial Falconet made a $3,000 deposit in the afternoon, on the 30th of June. The company records this deposit in its books but the deposit is yet to be processed and posted to the company’s bank account, thus, it does not appear on the bank statement that it receives for the month of June. Since the company has already recorded the deposits in transit in its books as cash receipts, the deposit amount must be added to the bank statement balance when preparing its bank reconciliation statement.

Recording deposits in transit is, therefore, one of the journal entries for bank reconciliations.

Bank reconciliation journal entry for outstanding checks

In business, it may take several days before a check that a company mails to a creditor, gets processed, deposited, and cleared at the bank; such checks are called outstanding checks. Due to this, a company’s record may show a number of checks that do not appear on the company’s bank statement.

Outstanding checks cause a company’s actual cash balance to be overstated in the bank statement because they have already been recorded in the company’s books as cash disbursements. Hence, they must be subtracted from the bank statement balance in a bank reconciliation.

Bank reconciliation journal entry for automatic withdrawals and deposits

One of the bank reconciliation journal entries is the journal entry for automatic withdrawals and deposits. Companies usually authorize banks to automatically transfer funds into their accounts or out of their accounts.

An automatic withdrawal made to a company’s bank account may be used to settle some liabilities such as utility bills, loans (notes payable or mortgages), etc. On the other hand, automatic deposits can be made to a company’s bank account when the bank collects notes receivable payments on behalf of the company or when automatic fund transfers are received from customers or other sources.

In order to notify companies about automatic withdrawals and automatic deposits, banks use debit memoranda and credit memoranda respectively. Unlike outstanding checks and deposits in transit that are already recorded in the company’s books, automatic withdrawals and deposits are usually brought to the company’s notice for the first time when it receives the bank statement.

Therefore, in a bank reconciliation, unrecorded automatic deposits are added to the company’s book balance, while unrecorded automatic withdrawals are subtracted from the company’s book balance. Then, a bank reconciliation journal entry is made to record the deposit or withdrawal.

For instance, assume a credit memorandum is attached to the Financial Falconet’s bank statement describing the bank’s collection of a $1,500 note receivable and $90 in interest. The bank deducted $25 for this service and therefore, made an automatic deposit of $1,565 to the account. The reconciling items in this transaction have not been recorded in the company’s book and will definitely affect the book balance on the bank reconciliation statement. They will need to be journalized and posted to the general ledger accounts.

Bank reconciliation journal entry examples for automatic withdrawals and deposits

That is, the $1,565 credit memorandum would require a compound journal entry involving four accounts as follows:

However, if Financial Falconet had previously made adjusting entries to record accrued interest revenue (by debiting interest receivable and crediting interest revenue), then in the journal entry shown above, it will be the Interest receivable A/c that would be credited for $90 instead of the Interest revenue A/c.

Furthermore, let’s assume the bank statement also includes a debit memorandum describing an automatic withdrawal of $253 for a utility payment. This will require a bank reconciliation journal entry as follows:

Bank reconciliation journal entry for interest earned

One of the common bank reconciliation journal entries is the journal entry to record interest earned. Banks usually pay interest on checking account balances which are reported as interest income on the bank statement. This interest income reported on the bank statement, however, is usually not accrued by the company and doesn’t appear in the book balance. Hence, in bank reconciliation, the interest income earned must be added to the company’s book balance.

If for instance, Financial Falconet has $18 in interest that has not been accrued but is listed on its bank statement, the $18 interest amount will be added to the company’s book balance. This reconciling item will then be journalized and posted to the general ledger account as follows:

Bank reconciliation journal entry for bank service charges

The Bank service charges journal entry is one of the journal entries for bank reconciliation. Bank service charges are usually shown on a company’s bank statement but not on the company’s book. Companies are usually required to pay bank charges such as check printing fees, monthly account fees, safe‐deposit box rental fees, etc.

On a bank reconciliation statement, the unrecorded bank service charges must be subtracted from the company’s book balance. Hence, a bank reconciliation journal entry is made to record bank charges as a credit to the Cash Account and a debit to an Expense Account (Bank Charges Expense or Miscellaneous Expense).

For example, assume the bank statement of Financial Falconet includes a $50 service charge for check printing, a $10 monthly maintenance fee, and a $30 service charge for the rental of a safe‐deposit box. That is, a bank reconciliation journal entry to record this reconciling item of $90 will be as follows:

Bank reconciliation journal entry for NSF (not sufficient funds) checks

The journal entry to record an amount on an NSF check is one of the bank reconciliation journal entries. In business, a check that was previously recorded as part of a deposit may likely bounce due to insufficient funds in the issuer’s checking account; such checks are called not sufficient funds (NSF) checks. In such a situation, the bank returns the check to the depositor and deducts the amount from the account.

The NSF check amount must, therefore, be subtracted from the company’s book balance on the bank reconciliation statement since it was previously recorded as a cash receipt. Hence, a journal entry is required to update the company’s books. Take, for instance, the bank statement of Financial Falconet includes an NSF check for $500 from ABC Inc. The bank reconciliation journal entry to account for this customer’s check that was returned due to insufficient funds will be as follows:

Bank reconciliation journal entry for errors

One of the bank reconciliation journal entries is the adjusting entry made to correct an error made by the company or bank. Sometimes, errors can be made by companies and banks, thus, every transaction on the bank statement and books should be checked thoroughly. If a bank made an error while recording a transaction, the bank has to be notified, and in a bank reconciliation, the bank balance has to be adjusted to show this.

On the other hand, if a company made an error while recording a transaction, the book balance on the bank reconciliation statement has to be adjusted and a correcting journal entry must be made and posted to the general ledger.

For example, assume Financial Falconet reviews its bank statement and discovers that a check of $381 that it made payable and issued to an advertising agency had been incorrectly entered in the cash disbursements journal for $318. Hence, the company’s general ledger cash account is overstated by $63, making this error a reconciling item.

Since Financial Falconet paid the advertising agency $63 more than the books show, a bank reconciliation journal entry is made to decrease the accounts payable balance owed to the agency and decrease the Cash Account. That is:

Read about: Types of adjusting entries with examples

Bank reconciliation journal entries examples

Using the bank reconciliation statement of ABC Company below, let us look at some bank reconciliation journal entries examples:

Bank reconciliation journal entries: example 1 (interest income)

The first reconciling item on ABC Company’s bank reconciliation statement is $3 in interest income. The bank reconciliation journal entry for this would be as follows:

Bank reconciliation journal entries: example 2 (bank collection of notes receivable)

The second reconciling item on ABC Company’s bank reconciliation statement is a $3,000 credit (deposit) that the bank showed in the bank statement. A credit memorandum attached to the bank statement explained that the bank’s collection department had gone after a customer that owed ABC Company $3,500 (note receivable) and recovered the outstanding debt. The bank kept $500 as a fee for recovering the debt and put $3,000 in ABC Company’s account.

The bank reconciliation journal entry to record this would be a debit to an expense account (Bank Charge Expense) for $500, a debit entry to the Cash account for $3,000, and then a credit to the Notes Receivable account for the full amount of the debt, to balance the entry. That is:

Bank reconciliation journal entry: example 3 (bank fee)

The third reconciling item on ABC Company’s bank reconciliation statement is a $5 bank fee. The bank reconciliation journal entry to record this is relatively straightforward:

Journal entries for bank reconciliation: example 4 (NSF check)

This next reconciling item on ABC Company’s bank reconciliation statement is an NSF check of $350. ABC company deposited a check for $350 from a customer but it bounced. The original journal entry ABC made to record the check received from the customer services performed in exchange for cash was a credit of $350 to Service Revenue and a debit of $350 to Cash Account.

However, as the check bounces, the bank adjusts the ABC Company account by subtracting the dishonored check from its balance. Hence, ABC Company has to go and try to get the money from the customer. This means that ABC Company earned the revenue, but the customer owes the company the money. Hence, a bank reconciliation journal entry will be entered as follows:

Bank reconciliation journal entry: example 5 (error)

Lastly, someone in the financial dept made an error when posting check #2005. The check was written for $5,843 but recorded in the company’s book as $5,483. This is a transposition error wherein two numbers are accidentally switched. Since $5,843 is the correct amount of the equipment purchase, it means the recorded amount is understated by $360. Hence, the company’s cash balance is overstated because it didn’t record the correct amount of the check.

The bank reconciliation journal entry for this error would be to decrease Cash and increase the Equipment account: