Managing Cash

Bank Reconciliation

Typically, a business will use a bank checking account to help control the flow of cash. Cash received during the day is deposited periodically in the bank account and checks are written on the account whenever cash is paid out.

When the bank account is opened, each authorized person signs a signature card. The bank can use the signature card at any time to make sure that the signature on the check is authentic and that money can be paid out of that account. When cash is deposited into the account, a deposit ticket is filled out listing the check number and the amount of each check and any additional currency. As the business makes payments, it will write checks on the bank account and record each check payment in the checkbook or on the check stub. Every month, the bank will send the business a bank statement, along with the cancelled checks paid that month.

The bank statement shows the balance at the beginning of the month, it lists each check paid, each deposit, any other charges or credits to the account, and it shows the balance at the end of the month. Usually the ending balances on the bank statement will not match the current cash account balance shown in the checkbook. This is because there may be checks that have been written and recorded in the checkbook but have not yet been processed and paid by the bank. There may also be service or other charges the bank has deducted from the bank statement balance but which have not yet been recorded and deducted from the checkbook balance.

For this reason, it is necessary at the end of each month to reconcile your bank statement. This is simply the process of making the proper adjustments to both the bank statement balance and to the checkbook balance to prove that they do in fact balance.

There are three steps to reconcile your bank statement.

Step 1:

Compare the deposits shown in the checkbook with those shown on the bank statement. Any deposits not yet shown on the bank statement are deposits in transit, that is, they are not yet received and recorded by the bank. Subtract the total of the deposits in transit from the final balance in your checkbook.

Step 2: 

Compare the canceled checks as shown on the bank statement with those recorded as written in the checkbook. Checks that have been written but not yet processed and paid by the bank are called outstanding checks. Add the total of the outstanding checks to the final balance in your checkbook.

Step 3:

Now look at the bank statement and see if there are any service charges or credits that are not yet recorded in the checkbook. Add the credits and subtract the charges from the final balance of your checkbook. The adjusted balances of your checkbook will now be equal to the ending balance on the bank statement.

All the checks and deposits entered in this program automatically list on the checkbook reconciliation screen. This saves time and makes the reconciliation process quick and easy.