Bank reconciliation journal entries: which items need one, with debits and credits

The rule: entries follow the book side

A reconciliation has a bank side and a book side. Items on the bank side are things your books already contain but the bank has not processed yet, or mistakes the bank made. Items on the book side are things the bank processed that your books do not contain yet, or mistakes you made. Only the book side changes your ledger.

AccountingCoach puts it directly: the items that require a journal entry are the items noted as adjustments to books. The OpenStax textbook says the same thing from the other direction: transactions the company already knew about are already journalized, while transactions only the bank knew about must be journalized in the company’s records.

Items that need a journal entry

Each entry below touches Cash and one other account. Account names vary by chart of accounts; use the one your business already uses.

• Bank service charge or check printing fee: debit Bank Service Charges (an expense), credit Cash.
• Fee for a returned check: debit Bank Service Charges, credit Cash. Some businesses instead debit Accounts Receivable if their terms let them charge the fee to the customer.
• Interest earned: debit Cash, credit Interest Income.
• Customer check returned NSF: debit Accounts Receivable, credit Cash. The customer still owes you, so the receivable comes back.
• Electronic customer payment not yet recorded: debit Cash, credit Accounts Receivable (or Sales if no invoice existed).
• Note collected by the bank: debit Cash, credit Notes Receivable for the principal and Interest Income for the interest.
• Automatic loan payment: debit Loan Payable for principal and Interest Expense for interest, credit Cash.
• Other automatic debit, such as insurance or a subscription: debit the matching expense, credit Cash.
• Your own posting error: debit or credit Cash for the difference and the original account for the other side.

Items that do not need a journal entry

If you post an entry for one of these, your cash will be counted twice or corrected for a mistake you did not make, and next month’s reconciliation will not balance.

• Deposits in transit: you already recorded the deposit. The bank will post it in the next few days.
• Outstanding checks: you already recorded the payment. The bank will deduct it when the payee cashes it.
• Bank errors: your books are right. Report the error to the bank and confirm the correction on the next statement. The Washington State Auditor’s cash manual says the same: correct errors in your records, and communicate bank errors to the bank to resolve.

Worked example with every entry

This example is fictional. Pinecrest Supply’s September 30 statement shows 10,000.00 and its ledger shows 9,918.25.

Bank side: deposit in transit 2,050.00, outstanding checks totaling 1,385.00, and a 90.00 withdrawal the bank charged in error. Adjusted bank balance: 10,000.00 + 2,050.00 − 1,385.00 + 90.00 = 10,755.00. No entries.

Book side: interest 8.75, a customer’s electronic payment of 1,460.00, a 25.00 service fee, a 12.00 returned check fee, a customer’s 340.00 NSF check, a 210.00 automatic insurance payment, and check 615 for utilities that cleared at 172.00 but was entered as 127.00 (a 45.00 understatement). Adjusted book balance: 9,918.25 + 8.75 + 1,460.00 − 25.00 − 12.00 − 340.00 − 210.00 − 45.00 = 10,755.00.

The seven entries debit Cash 1,468.75 in total (8.75 + 1,460.00) and credit Cash 632.00 in total (25.00 + 12.00 + 340.00 + 210.00 + 45.00). The net increase is 836.75, and 9,918.25 + 836.75 = 10,755.00, which equals the adjusted bank balance. The table below lists every line.

Correcting book errors in either direction

If you recorded a payment for less than it cleared, your cash is overstated: credit Cash and debit the expense for the difference, as with check 615 above. If you recorded a payment for more than it cleared, such as a 63.00 check entered as 630.00, your cash is understated by 567.00: debit Cash 567.00 and credit the expense 567.00.

Deposits work the other way. A deposit recorded for less than the bank credited needs a debit to Cash; one recorded for more needs a credit to Cash. In each case the other side goes to the account used in the original entry.

Getting the matching right before you post

Journal entries are only as good as the matching behind them. If the statement arrives as a PDF, getting it into a spreadsheet is usually the slowest step. Fulla Ledger converts statement PDFs into rows you check against the source page and approve before exporting to Excel, CSV or OFX for QuickBooks Online or Xero, which makes it easier to spot the fees and automatic payments you have not recorded.