Why don't the two balances agree?
A bank reconciliation compares the bank balance in the business's books with the balance on the bank statement at the same date, then explains every difference. The two balances rarely agree straight away, and the reason is one of two types:
- Timing differences: transactions the business has recorded that have not reached the bank yet, or transactions the bank has processed that the business is not yet aware of.
- Errors: an amount recorded incorrectly in the books, or an incorrect transaction by the bank.
The monthly reconciliation is one of the most important internal controls over cash. It reveals unexpected fees, unrecorded transfers and any manipulation early.
The practical steps
- Gather the month-end bank statement, the bank account activity report from the books for the same period, and the previous month's reconciliation.
- Match every transaction on the statement with its counterpart in the books, and tick off the matched items.
- Unmatched items in the books are usually checks or outgoing transfers not yet cleared and deposits in transit. These are adjusted against the bank balance.
- Unmatched items on the statement are usually bank fees, incoming customer transfers, or point of sale (POS) settlements that have not been recorded. These are adjusted against the book balance.
- Review for errors: compare amounts digit by digit, because transposition errors are common.
- Prepare the reconciliation until the two adjusted balances are equal, then record adjusting entries for the items that relate to the books.
Solved example
On 31 March, the bank balance in the books of an appliance store was 85,075 SAR, and the bank statement balance was 92,150 SAR. The comparison revealed the following:
- Two checks issued to suppliers not yet cleared: No. 1023 for 6,300 and No. 1027 for 3,500.
- A cash deposit on the last day of 4,200 that did not appear on the statement.
- Bank fees of 100 SAR plus 15 SAR VAT, deducted by the bank and not recorded.
- A transfer from a customer of 1,500 SAR not recorded in the books.
- A payment to a supplier of 2,340 recorded in the books in error as 2,430.
| Bank balance per statement | Amount |
|---|---|
| Balance per statement | 92,150 |
| Add: deposit in transit | 4,200 |
| Less: outstanding checks (6,300 + 3,500) | (9,800) |
| Adjusted balance | 86,550 |
| Bank balance per books | Amount |
|---|---|
| Balance per books | 85,075 |
| Add: unrecorded customer transfer | 1,500 |
| Add: correction of payment error (2,430 - 2,340) | 90 |
| Less: bank fees including VAT | (115) |
| Adjusted balance | 86,550 |
The two adjusted balances agree at 86,550 SAR, which is the balance shown in the statement of financial position.
Adjusting entries
Only the items that adjusted the book balance are recorded in the books. Outstanding checks and the deposit in transit need no entry because they are already recorded.
| Description | Debit | Credit | Amount |
|---|---|---|---|
| Bank fees | Bank charges expense | Bank | 100 |
| VAT on fees | VAT - input | Bank | 15 |
| Customer transfer | Bank | Accounts receivable | 1,500 |
| Payment correction | Bank | Accounts payable | 90 |
Practices that save you time
- Reconcile at least monthly, and weekly if activity is heavy or you have several POS terminals.
- Follow up checks outstanding for more than three months, and contact the payee to find out why.
- Record POS terminal settlements at the gross amount, then the fee separately, so that sales agree with the amounts deposited.
- Segregate duties: the person who prepares the reconciliation should not be the one who issues payments, and a third person approves it.
A short template to keep on file
To standardize the monthly work, adopt a fixed reconciliation template containing the following information, and keep it with the bank statement in the month's file:
- The bank name, the abbreviated account number and the currency, and the reconciliation date.
- The balance per statement, followed by the list of deposits in transit and outstanding checks, with each check's number, date and payee name.
- The balance per books, followed by the items the bank recorded that have not been recorded in the books, and any errors found.
- The two adjusted balances, which must be equal.
- The numbers of the adjusting entries recorded, and the names of the preparer and approver, with the date.
The next month, the first thing to do is check the open items in the previous reconciliation: have checks 1023 and 1027 cleared? Did the 4,200 SAR deposit appear in the first days of April? Any item that appears in more than two consecutive reconciliations without explanation deserves investigation. A deposit in transit that does not appear on the statement within two or three days at most is a real red flag, because it may mean cash was recorded in the books but never actually deposited.
This way, the reconciliation turns from a routine task into a real control tool, and the external auditor finds everything they need in one place.