The debt to us on our books was recorded as a note receivable (which we will study later). They kept $500 as a fee for doing that work for us and put $3,000 in our account. It turns out, after a call to the bank and examining some supporting documents, a customer owed us $3,500 and we had almost given up on it, but the bank’s collection department had gone after the customer and recovered the outstanding debt (because we had asked them to). The second item was a $3,000 credit (deposit) that the bank showed in our account that we had no idea was there. To record interest revenue per Sept bank statement The first reconciling item was $3 in interest income. If we subtracted something, we will CREDIT the checking account. If we added an item in the bank reconciliation, we will DEBIT the checking account (because a debit increases an asset account in a GL). For purposes of this lesson, we’ll prepare journal entries. In any case, those items that reconcile the general ledger (book balance) to the adjusted bank balance (the target) have to be recorded. Usually, a staff member is not allowed to make journal entries or process transactions outside of his or her normal sphere of duties in order to prevent theft or mistakes. This decision is a combination of (a) the system you are using, (b) your internal accounting process, and (c) internal control constraints. If you come to the end of the period and you find you have to make adjustments, you also have to decide if you will record them as journal entries or go through the automated process you would have used if you’d known about the transaction when it happened. However, in an automated system, the normal daily transactions would be entered through various forms and processes, such as the cash receipts module or accounts payable and cash disbursements. As you may have realized by now, there really isn’t much difference between the two in an old-fashioned paper system. ![]() We do this recording with either (a) regular journal entries or (b) adjusting journal entries. However, all the items in the second half of the reconciliation (or on the right side, if you are preparing the bank reconciliation in two side-by-side columns) need to be recorded in our GL. If that kind of error happens, we have to do some research and contact the bank to make sure it gets corrected, but we do not have to change our books. (Remember that our demand deposit with the bank is a liability to the bank, just as it is an asset to us, so the bank increases our account with a credit entry). Occasionally we discover a bank error, such as a deposit we have proof of making that did not get “credited” to our account. Bank internal accounting controls are rigorous (but not foolproof), so the bank statement serves as our best external objective verification of the actual GL account balance once we take those timing differences into account. ![]() ![]() The additions and subtractions to the bank balance to account for timing differences, usually deposits in transit and outstanding checks, are not “adjustments” in the sense of the accounting cycle-they only help us arrive at our target balance: what we believe the GL balance should be if the bank is right (and it usually is). Let’s start by reviewing the two-part bank reconciliation for My Company from the previous section: My Company Demonstrate journal entries related to bank reconciliations.
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