Cash receipts are recorded as an increase of cash in the company’s accounting records when they are received. These cash receipts are deposited by the company into its bank. The bank records an increase in cash only when these amounts are actually deposited with the bank. Not all cash receipts recorded by the company may have been recorded by the bank when the bank statement is prepared. There may be outstanding deposits (also called deposits in transit). Outstanding deposits cause the bank statement cash balance to be understated. Therefore, outstanding deposits are a reconciling item that must be added to the unreconciled bank balance on the bank reconciliation.
On the date that a cheque is prepared by a company, it is recorded as a reduction of cash in a company’s general ledger. A bank statement will not record a cash reduction until a cheque clears the bank. Outstanding cheques mean that the bank statement balance is overstated. Therefore, outstanding cheques are a reconciling item that must be subtracted from the unreconciled bank balance on the bank reconciliation as shown in Figure 7.1 above.
Bank errors sometimes occur and are not revealed until the transactions on the bank statement are compared to the company’s accounting records. When an error is identified, the company notifies the bank to have it corrected. Depending on the nature of the error, it is either added to or subtracted from the unreconciled bank balance on the bank reconciliation. For example, if the bank cleared a cheque as $520 that was correctly written for $250, the $270 difference would be added to the unreconciled bank balance on the bank reconciliation. The cash balance reported on the bank statement is understated by $270 as a result of this error. As another example, if the bank recorded a deposit as $520 when the correct amount was actually $250, the $270 difference would be subtracted from the unreconciled bank balance on the bank reconciliation. The cash balance reported on the bank statement is overstated by $270 as a result of this specific error. Each error must be carefully analyzed to determine how it will be treated on the bank reconciliation.
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