Bank Reconciliation Example: Step-by-Step Worked Solution
Tutorly · Financial Accounting
Bank Reconciliation Example: Step-by-Step Worked Solution
To prepare a bank reconciliation you adjust two sides to the same number. On the bank side, add deposits in transit and subtract outstanding cheques. On the book side, add items the bank recorded that you didn’t (interest, collections) and subtract charges, NSF cheques, and your own errors. When both adjusted balances match, you’re done — and only the book-side items get journal entries.
The setup
At March 31, a company’s cash ledger shows $8,560 and the bank statement shows $8,420. Here’s this bank reconciliation example, side by side.
| Balance per bank statement | 8,420 |
| + Deposit in transit | 1,250 |
| − Outstanding cheques | (940) |
| Adjusted bank balance | 8,730 |
| Balance per books | 8,560 |
| + Note collected by bank | 600 |
| + Interest earned | 35 |
| − NSF cheque (customer) | (400) |
| − Bank service charges | (25) |
| − Cheque recording error | (40) |
| Adjusted book balance | 8,730 |
The journal entries (book side only)
The bank-side items are just timing — the bank will catch up. Only the book-side adjustments need entries:
| Cash | 635 | |
| Notes receivable | 600 | |
| Interest revenue | 35 |
| Accounts receivable | 400 | |
| Bank charges expense | 25 | |
| Accounts payable | 40 | |
| Cash | 465 |
Net effect on cash: +635 − 465 = +170, moving the books from $8,560 to $8,730.
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Common errors that break a reconciliation
Watch for: putting a book item on the bank side (or vice versa), forgetting the sign on a recording error, missing the NSF cheque (it reduces cash), and not making journal entries for the book-side items. If you’re off by a round number, look for a transposed digit; if you’re off by an even amount, you may have added something you should have subtracted.
Frequently asked questions
How do you prepare a bank reconciliation?
Adjust the bank balance for deposits in transit and outstanding cheques, adjust the book balance for bank-recorded items and errors, and confirm both sides reach the same total — then journalize only the book-side adjustments.
Which side gets journal entries?
Only the book side. Bank-side items (deposits in transit, outstanding cheques) are timing differences the bank will record on its own.
Does an NSF cheque increase or decrease cash?
It decreases cash — the customer’s payment bounced, so you reverse it back into accounts receivable.
Why don’t the two balances match before adjusting?
Because of timing (items recorded by one party but not the other) and errors or bank charges you haven’t booked yet.
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