Bank Reconciliation: A Simple Guide with Journal Entries
Written by Mansour Farhat, CPA, CIA, DBA, founder of Farhat Lectures and an accounting educator with years of experience teaching CPA candidates and college accounting students. Last updated November 2026.
A bank reconciliation is a schedule that explains the differences between the bank statement balance and the company’s Cash account, then brings both to the same corrected balance. You adjust the bank side for timing items and bank errors, and the book side for unrecorded items and errors in the company’s records. Only book-side adjustments create journal entries.
This process helps detect omitted fees, returned customer checks, and recording errors before cash is reported. This topic appears in financial and intermediate accounting courses and on the FAR section of the CPA exam. All examples and practice questions are hypothetical.
Bank reconciliation is an internal control that supports accurate cash reporting. It is also tested on the Financial Accounting and Reporting (FAR) section of the CPA exam.
Key Takeaways
- A bank reconciliation brings the bank balance and the book balance to the same corrected cash figure.
- Fix the bank side for deposits in transit, outstanding checks, and bank errors. These need no journal entry.
- Fix the book side for interest and collections, service fees, NSF checks, and your own recording errors. These do need journal entries.
- For a recording error, adjust only the difference, not the full amount of the original transaction.
Watch: Bank Reconciliation: Example
Watch Professor Farhat work through a bank reconciliation, then complete the independent Maple Services example below.
Bank Reconciliation: Which Side Should Change?
The bank and the company record the same cash activity at different times. A deposit may be recorded by the company before it appears on the bank statement. Conversely, the bank may charge a service fee before the company learns about it.
For each difference, ask: Which record is missing the correct effect on cash? Then decide whether that record is too high or too low. This reasoning is more dependable than memorizing that every error is an addition or that every check is a deduction.
| Reconciling item | Adjustment | Company entry? |
|---|---|---|
| Deposit in transit already recorded by company | Add to bank balance | No |
| Outstanding check already recorded by company | Subtract from bank balance | No |
| Unrecorded interest or collection by bank | Add to book balance | Yes |
| Unrecorded bank service fee | Subtract from book balance | Yes |
| Customer check returned for not sufficient funds (NSF) | Subtract from books if not yet recorded | Yes |
| Bank error | Correct the bank side in the required direction | No; notify bank |
| Company recording error | Correct the book side in the required direction | Yes |
An outstanding check has been issued and entered in the company’s books but has not cleared the bank. A deposit in transit has entered the company’s records but has not yet entered the bank’s records. Neither requires the company to record the transaction a second time.
A Practical Reconciliation Process
- Use the bank statement and ledger balances for the same date.
- Match deposits and payments; carry forward valid unresolved items from the prior reconciliation.
- Identify bank-only transactions and investigate errors.
- Adjust each side to the corrected cash balance.
- Post book-side entries, notify the bank about its errors, and obtain independent review.
Document support for every reconciling item. A difference is not resolved by inserting an unexplained amount merely to make the totals agree. Follow up on old outstanding checks and deposits that do not clear as expected.
Complete Bank Reconciliation Example
At June 30, Maple Services has a bank statement balance of $18,450 and a ledger Cash balance of $18,320. Its review identifies the following items:
- A $2,750 deposit is recorded in the books but absent from the statement.
- Issued checks totaling $3,200 have not cleared.
- The bank incorrectly charged Maple $400 for another customer’s check.
- The bank collected $600 principal and $120 interest on a note; neither amount is recorded in the books.
- A $35 bank fee and a $425 returned NSF customer check are unrecorded.
- A $960 payment of accounts payable was incorrectly entered as $780; the bank paid the correct $960.
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Statement balance | $18,450 | Ledger balance | $18,320 |
| Add deposit in transit | 2,750 | Add note and interest collection | 720 |
| Add incorrect bank charge | 400 | Subtract service fee | (35) |
| Subtract outstanding checks | (3,200) | Subtract NSF check | (425) |
| — | — | Subtract book error: $960 − $780 | (180) |
| Corrected cash balance | $18,400 | Corrected cash balance | $18,400 |
The company understated its payment by $180, so its book cash is $180 too high. Subtract the difference, not the full $960. The bank’s unrelated $400 charge understated the bank balance, so add that amount on the bank side and request correction.
Journal Entries for the Book-Side Adjustments
Maple records the following entries for June. No interest receivable had previously been accrued in this hypothetical example.
| Purpose | Debit | Credit |
|---|---|---|
| Record note collection | Cash $720 | Notes Receivable $600; Interest Revenue $120 |
| Record bank fee | Bank Service Charge Expense $35 | Cash $35 |
| Restore returned customer balance | Accounts Receivable $425 | Cash $425 |
| Correct understated supplier payment | Accounts Payable $180 | Cash $180 |
The note principal is collection of an asset, not interest revenue. The NSF entry restores the customer’s debt because the attempted payment failed. It is not automatically a bad debt expense or a sale reversal.
After posting, Cash equals $18,320 + $720 − $35 − $425 − $180 = $18,400. The bank-side timing items remain on the reconciliation until they clear. Record no company entry for the bank’s own error when the company’s original records are correct.
Common Mistakes and Important Boundaries
Changing both sides for one timing item. The deposit and outstanding checks were already recorded in the books. Adding or deducting them again duplicates their effects.
Confusing a bank debit with the company’s debit. A debit on the bank statement often reduces the customer’s deposit balance. From the company’s perspective, reducing the Cash asset requires a credit.
Mixing a separate petty cash fund into this bank account. Reconcile only the one bank account and the ledger balance that matches it. A petty cash fund is counted and reconciled on its own, so leave it out of this reconciliation. If you have deposits that are already in this ledger account but not yet at the bank, you can list them on the bank side to explain the balance.
Assuming agreement proves every payment is proper. Reconciliation verifies recorded balances; cash authorization and safeguarding controls remain necessary. Keep evidence of review and resolution.
Electronic Items and the Adjusted-Balance Method
Most reconciliations today also include electronic items the company may not have recorded yet, such as electronic funds transfers (EFTs), Automated Clearing House (ACH) payments, lockbox collections, and card or merchant processing fees. Treat each one the same way you treat any other item: ask which record is missing the effect on cash, then fix that side.
The two-column format on this page is the adjusted-balance method, where you bring both the bank balance and the book balance to one corrected figure. You can also run a book-to-bank or bank-to-book format, but the adjusted-balance method makes unrecorded entries easiest to see.
Bank Reconciliation Interactive Exercise
Practice identifying deposits in transit, outstanding checks, bank charges, bank credits, and bank or depositor errors.
Complete five matching questions and three multiple-choice questions. Then select Check answers for your score and explanations. Each question is worth one point.
Test your understanding of bank reconciliation with the eight questions below. After reviewing your feedback, continue to the calculation practice and journal-entry explanations.
Study notes: reconciliation of bank balances
A bank statement is a copy of the bank’s record of its account with the customer. A bank reconciliation is a schedule explaining differences between the bank’s and the company’s records of cash.
- Deposits in transit
- End-of-month cash deposits recorded in the depositor’s books in one month but received and recorded by the bank in the following month.
- Outstanding checks
- Checks recorded by the depositor when written that have not yet been recorded, or cleared, by the bank.
- Bank charges
- Charges recorded by the bank against the depositor’s balance, including bank services, printing checks, not-sufficient-funds (NSF) checks, and safe-deposit box rentals.
- Bank credits
- Collections or deposits made by the bank for the depositor’s benefit. Examples include note collections and interest earned on interest-bearing checking accounts.
- Bank or depositor errors
- Mistakes by either the bank or the depositor that cause the bank balance to disagree with the depositor’s book balance.
If the difference results only from transactions not yet recorded by the bank, the company’s record of cash is considered correct. If part of the difference arises from other items, either the bank or the company must adjust its records.
Practice Questions and Explanations
1. Calculate adjusted bank cash
The bank balance is $12,600, deposits in transit are $1,100, and outstanding checks total $1,850. What is adjusted bank cash?
Answer: $11,850: $12,600 + $1,100 − $1,850. No company entries arise from these timing differences if already recorded correctly.
2. Correct a payment error
A $540 supplier payment was recorded as $450. Which adjustment is needed?
Answer: Subtract $90 from book cash. Debit Accounts Payable $90 and credit Cash $90, assuming the original entry debited Accounts Payable.
3. Distinguish an NSF check from a fee
The bank returns a $280 customer check and charges a separate $12 fee. Neither is recorded. What changes?
Answer: Credit Cash $292, debit Accounts Receivable $280, and debit Bank Service Charge Expense $12. The customer debt and bank fee are distinct items.
Frequently Asked Questions
Do outstanding checks require adjusting entries?
No, if the company already recorded them correctly. They reduce the bank side until cleared.
Which cash balance is reported?
The corrected, reconciled balance for the account, after the required book entries. Total reported cash may also include other properly verified cash balances.
Can a bank reconciliation start with either balance?
Yes. A reconciliation can bridge one balance to the other, or adjust both to a common corrected amount. The two-sided format used here makes missing entries easier to identify.
What is the difference between the bank side and the book side?
The bank side fixes items the bank has not processed yet, like deposits in transit and outstanding checks, plus any bank mistakes. The book side fixes unrecorded items, such as interest collected, service fees, and NSF checks, as well as errors in the company’s records. Only book-side items need journal entries.
How do you record an NSF check?
Debit Accounts Receivable and credit Cash for the amount of the returned check, because the customer’s payment failed and they still owe you. If the bank charged a separate fee, record that fee as its own expense.
Sources and Further Study
The Washington State Auditor’s bank reconciliation guidance explains timing differences, unrecorded bank activity, and investigation of errors. Its governmental reporting requirements are separate from the general reconciliation mechanics illustrated here.
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