Adjusted bank reconciliation

What Is Adjusted Bank Reconciliation?

Adjusted bank reconciliation is a critical process within accounting and financial reporting where an entity compares its internal cash account records with the balance reported by its bank, making necessary adjustments to both to arrive at a true, reconciled cash balance. This process aims to identify and explain any discrepancies between the two sets of records, which can arise due to timing differences, errors, or unrecorded transactions. By performing an adjusted bank reconciliation, businesses gain a precise understanding of their actual cash flow and financial position, ensuring the integrity of their financial statements. It is a foundational component of sound internal controls and accurate bookkeeping.

History and Origin

The practice of reconciling bank accounts has been an essential part of accounting since the advent of formalized banking and record-keeping. As businesses began depositing funds and issuing checks, discrepancies between their internal ledgers and bank statements naturally arose due to delays in processing or recording. The need to verify the true amount of available cash drove the development of systematic reconciliation procedures. Over time, these practices evolved into the structured process known today, essential for financial accuracy and fraud detection. The importance of robust financial controls, including reconciliation, was further emphasized with legislative measures like the Sarbanes-Oxley Act of 2002 (SOX), which mandates strict internal controls for publicly traded companies in the United States to ensure reliable financial reporting and protect investors.¹⁴

Key Takeaways

• Adjusted bank reconciliation compares a company's cash records with its bank statement to pinpoint and resolve discrepancies.
• The primary goal is to determine the true, available cash balance, often referred to as the "adjusted" balance.
• Common reconciling items include deposits in transit, outstanding checks, bank service charges, interest earned, and errors.
• Regular performance of adjusted bank reconciliation helps detect errors, prevent fraud, and ensures accurate financial reporting.
• It is a vital internal control activity, providing management with an accurate cash position for informed decision-making.

Formula and Calculation

The adjusted bank reconciliation involves adjusting both the bank's balance and the company's book balance until they agree on a single, true cash figure. The formula applies adjustments to each starting balance:

Adjusted Bank Balance:

• Bank Balance (per statement): The ending cash balance reported on the bank statement.
• Deposits in Transit: Cash or checks received and recorded by the company but not yet processed by the bank.¹³
• Outstanding Checks: Checks issued and recorded by the company but not yet cleared (cashed) by the bank.¹²
• Bank Errors: Mistakes made by the bank (e.g., incorrect debits or credits).

Adjusted Book Balance:

• Book Balance (per general ledger): The ending cash balance according to the company's internal accounting records.
• Bank Collections: Amounts collected by the bank on behalf of the company (e.g., interest income, direct deposits, or collected notes receivable) that the company may not have recorded yet.¹¹
• Bank Service Charges: Fees charged by the bank that the company may not have recorded.¹⁰
• NSF Checks: Checks received by the company and deposited, but returned by the bank due to insufficient funds in the payer's account.
• Company Errors: Mistakes made by the company in its journal entries (e.g., incorrect amounts, duplicate entries).

After these adjustments, the Adjusted Bank Balance should precisely equal the Adjusted Book Balance.

Interpreting the Adjusted Bank Reconciliation

Interpreting the adjusted bank reconciliation centers on the concept of achieving congruence between two independent records of cash. When the adjusted bank balance matches the adjusted book balance, it signifies that all known cash transactions have been accounted for and reconciled. This reconciled figure represents the true amount of cash available to the company at that specific point in time, which is crucial for managing cash flow and making accurate operational decisions.

Any remaining variance after applying all known adjustments indicates an unidentifiable error or omission that requires further investigation. A successfully adjusted bank reconciliation provides assurance in the accuracy of the cash balance reported on the balance sheet and validates the integrity of the underlying accounting records.

Hypothetical Example

Consider "Smoothie Central," a small business. At the end of June, their bank statement shows a balance of $12,000, while their general ledger cash account shows $11,500. Smoothie Central prepares an adjusted bank reconciliation as follows:

Bank Side Adjustments:

1. Deposits in Transit: A deposit of $1,500 made on June 30th was recorded in Smoothie Central's books but appeared on the bank statement only on July 1st.
2. Outstanding Checks: Checks totaling $800 issued to suppliers have been recorded by Smoothie Central but have not yet cleared the bank.
3. Bank Error: The bank incorrectly debited Smoothie Central's account by $50 for a transaction belonging to another customer.

Company Book Side Adjustments:

1. Bank Service Charge: The bank statement shows a service charge of $20 that Smoothie Central had not yet recorded.
2. Interest Earned: The bank statement shows $70 in interest earned on the account, which Smoothie Central had not yet recorded.
3. NSF Check: A customer's check for $200 bounced (Non-Sufficient Funds), and the bank statement shows this deduction. Smoothie Central needs to account for this.

Adjusted Bank Reconciliation for Smoothie Central - June 30th

Correction: My example showed the adjusted balances not matching. Let me fix the example to ensure they match for a proper reconciliation.

Revised Hypothetical Example for Smoothie Central - June 30th

Consider "Smoothie Central," a small business. At the end of June, their bank statement shows a balance of $12,000, while their general ledger cash account shows $11,500. Smoothie Central prepares an adjusted bank reconciliation as follows:

Bank Side Adjustments:

1. Deposits in Transit: A deposit of $1,500 made on June 30th was recorded in Smoothie Central's books but appeared on the bank statement only on July 1st.
2. Outstanding Checks: Checks totaling $800 issued to suppliers have been recorded by Smoothie Central but have not yet cleared the bank.

• Adjusted Bank Balance Calculation: $12,000 (Bank Balance) + $1,500 (Deposits in Transit) - $800 (Outstanding Checks) = $12,700.

Company Book Side Adjustments:

1. Bank Service Charge: The bank statement shows a service charge of $20 that Smoothie Central had not yet recorded.
2. Interest Earned: The bank statement shows $70 in interest earned on the account, which Smoothie Central had not yet recorded.
3. NSF Check: A customer's check for $200 bounced (Non-Sufficient Funds), and the bank statement shows this deduction. Smoothie Central needs to account for this.
4. Company Error: Smoothie Central recorded a check payment for utilities as $350, but the actual check amount was $500. This is an under-recording error, so an additional $150 needs to be deducted from the books.

• Adjusted Book Balance Calculation: $11,500 (Book Balance) + $70 (Interest Earned) - $20 (Bank Service Charge) - $200 (NSF Check) - $150 (Company Error) = $11,200.

Still not matching. Let's make the numbers align better for a successful reconciliation example. The purpose of the adjusted bank reconciliation is that both should match.

Final Revised Hypothetical Example:

Consider "Smoothie Central." At the end of June, their bank statement shows a balance of $12,000, while their general ledger cash account shows $11,500.

Adjustments to Bank Balance:

• Deposits in Transit: A deposit of $1,500 made on June 30th by Smoothie Central has not yet appeared on the bank statement.
• Outstanding Checks: Checks totaling $800 issued to suppliers have been recorded by Smoothie Central but have not yet cleared the bank.
  • Bank Adjusted Balance: $12,000 + $1,500 - $800 = $12,700.

Adjustments to Book Balance:

• Bank Service Charge: The bank statement includes a $20 service charge that Smoothie Central had not yet recorded.

• Interest Earned: The bank statement shows $70 in interest earned on the account, which Smoothie Central had not yet recorded.

• NSF Check: A customer's check for $200 bounced, reducing the bank balance. Smoothie Central must also reduce its cash account for this.

• Error: Smoothie Central mistakenly recorded a $1,000 payment from a client as $100. This is an under-recording of $900. To correct, the book balance needs to be increased by an additional $900 (because it was recorded too low).

  • Book Adjusted Balance: $11,500 (initial) + $70 (interest) - $20 (service charge) - $200 (NSF) + $900 (error correction) = $12,250.

Still not matching. This is tricky to get right on the fly with random numbers. Let me simplify the example to ensure the adjusted balances match.

Simplified Hypothetical Example:

Let's assume "Tech Solutions Inc." is performing its adjusted bank reconciliation for May.

• Bank statement balance as of May 31: $10,000
• Company's cash general ledger balance as of May 31: $9,500

Adjustments to Bank Balance:

1. Deposits in Transit: Tech Solutions Inc. made a deposit of $2,000 on May 31st, which the bank will process on June 1st.

2. Outstanding Checks: Several checks issued by Tech Solutions Inc. totaling $1,500 have not yet cleared the bank.

   • Adjusted Bank Balance: $10,000 (Bank Statement) + $2,000 (Deposits in Transit) - $1,500 (Outstanding Checks) = $10,500.

Adjustments to Book Balance:

1. Bank Service Charge: The bank statement shows a $50 service charge that Tech Solutions Inc. had not yet recorded in its books.

2. Interest Earned: The bank statement shows $50 interest earned on the account, which Tech Solutions Inc. also had not recorded.

3. Error: Tech Solutions Inc. accidentally recorded a payment of $200 for office supplies as $2,000. This is an overstatement of an expense, meaning the cash balance was understated by $1,800. To correct, the book balance must be increased by $1,800.

   • Adjusted Book Balance: $9,500 (General Ledger) - $50 (Bank Service Charge) + $50 (Interest Earned) + $1,800 (Error Correction) = $11,250.

Still mismatching. Okay, I need to generate consistent numbers.

Corrected Hypothetical Example:

Let's use the example from a search result⁹.
Greg's Popsicle Stand.

• Bank balance: $1,081
• Books balance: $1,200

Adjustments from⁸:

• Add outstanding deposits: $100 (example value from source)
• Deduct outstanding withdrawals (checks): $20 (example value from source)
• No other items listed that directly reconcile to match the book side in this particular snippet, but it implies the final amount is $1,181. Let's derive the book adjustments to match.

If adjusted bank balance is target $1,181:
$1,081 (Bank) + $120 (Deposits in Transit) - $20 (Outstanding Checks) = $1,181.

Now, for the book side to reach $1,181 from $1,200:
$1,200 (Books) - X (something) = $1,181.
X = $1,200 - $1,181 = $19.
This $19 could be a combination of bank fees, NSF checks, or company errors that reduce the book balance. Let's assume a bank fee.

Hypothetical Example

Consider "Greg's Popsicle Stand." At the end of February, the bank statement shows a balance of $1,081, while the company's general ledger cash account shows $1,200. Greg needs to perform an adjusted bank reconciliation.

Adjustments to Bank Balance:

1. Deposits in Transit: A deposit of $120 made on February 28th was recorded by Greg but has not yet appeared on the bank statement.

2. Outstanding Checks: A check for $20 issued to a supplier was recorded by Greg but has not yet cleared the bank.

   • Adjusted Bank Balance: $1,081 (Bank Statement) + $120 (Deposits in Transit) - $20 (Outstanding Checks) = $1,181.

Adjustments to Book Balance:

1. Bank Service Charge: The bank statement includes a $19 service charge that Greg had not yet recorded in his books.

   • Adjusted Book Balance: $1,200 (General Ledger) - $19 (Bank Service Charge) = $1,181.

After these adjustments, both the bank balance and the book balance reconcile to $1,181, representing the true cash position of Greg's Popsicle Stand. This process allows Greg to confidently record the correct cash figure in his financial statements.

Practical Applications

Adjusted bank reconciliation is a cornerstone of financial management across various sectors. In corporate finance, it is essential for treasury departments to monitor and manage liquidity, ensuring accurate cash positions for daily operations and strategic investments. Businesses, regardless of size, use it to verify the accuracy of their accounting software records against external bank statements, identifying discrepancies that could indicate data entry errors, unrecorded transactions, or even fraudulent activity.⁷

For public companies, compliance with regulations like the Sarbanes-Oxley Act (SOX) often emphasizes robust internal controls, and timely, accurate bank reconciliations are a key part of demonstrating such controls.⁶ Furthermore, this process is vital for external auditors who rely on reconciled cash balances to attest to the fairness and accuracy of a company's financial statements. Banks themselves perform reconciliations internally to match their records with those of their customers, especially with the rise of real-time payment systems like FedNow, which require continuous reconciliation processes.⁵ This meticulous process prevents financial misstatements and underpins effective cash management.

Limitations and Criticisms

While an adjusted bank reconciliation is a vital tool, it does have limitations. The process is retrospective, meaning it identifies discrepancies after they have occurred, rather than preventing them in real-time. This can be a drawback for businesses with high transaction volumes, where delays in reconciliation could obscure immediate cash flow issues or ongoing fraudulent activities.⁴

Another limitation is that the effectiveness of the reconciliation heavily relies on the accuracy and completeness of the initial data from both the bank statement and the company's internal general ledger. Human error during data entry or oversight in identifying all reconciling items can compromise the accuracy of the adjusted balance. Furthermore, for highly complex organizational structures with multiple bank accounts and inter-company transfers, manual reconciliation can be time-consuming and prone to error, potentially reducing its efficiency as a control mechanism. Despite these points, its role in validating cash balances and identifying errors remains indispensable.

Adjusted Bank Reconciliation vs. Bank Reconciliation Statement

The terms "adjusted bank reconciliation" and "bank reconciliation statement" are closely related but refer to different aspects of the same financial process. An adjusted bank reconciliation refers to the process of comparing a company's cash records with its bank statement and making the necessary adjustments to both sides (bank and book) to arrive at a true, reconciled cash balance. It is the action and analytical procedure undertaken to achieve agreement.

Conversely, a bank reconciliation statement is the document or report generated at the end of the reconciliation process. It formally presents the comparison of the bank balance and the book balance, itemizing all the reconciling differences (like deposits in transit, outstanding checks, bank service charges, etc.) and showing how both initial balances are adjusted to arrive at the identical, true cash balance. The statement serves as documented proof that the reconciliation was performed and provides an audit trail of the adjustments made.

FAQs

Why is an adjusted bank reconciliation important?

An adjusted bank reconciliation is crucial because it helps businesses confirm the actual amount of cash available, detect accounting errors, identify unauthorized transactions or fraud, and ensure that the cash balance reported on the balance sheet is accurate. It provides a clear picture of liquidity.

How often should a business perform an adjusted bank reconciliation?

Most businesses perform adjusted bank reconciliations at least monthly, typically when they receive their bank statements.³ However, businesses with high transaction volumes or significant cash activity may choose to reconcile weekly or even daily to maintain tighter cash management and control.²

What are common reasons for discrepancies in bank reconciliation?

Common discrepancies include timing differences, such as deposits in transit (company recorded, bank not yet) and outstanding checks (company wrote, bank not yet cleared). Other reasons include unrecorded bank activities like service charges or interest earned, and errors made by either the company or the bank.

Does accounting software eliminate the need for adjusted bank reconciliation?

While modern accounting software can automate much of the matching process and reduce manual errors, it does not entirely eliminate the need for adjusted bank reconciliation. The software can highlight discrepancies, but a human still typically needs to review, investigate, and approve the adjustments, especially for unusual items or errors, to ensure the accuracy and integrity of the financial records.

Who is typically responsible for performing bank reconciliations?

In a business, the responsibility for performing bank reconciliations usually falls to a bookkeeper, an accountant, or a member of the finance department. Ideally, the person preparing the reconciliation should not be the same person who handles cash receipts or disbursements to ensure proper segregation of duties, which is a key internal control principle aimed at preventing fraud.¹