Bank Reconciliation Made Easy: Part I

Is reconciling your organization’s cash records to the monthly bank statement a task that causes you to shudder? Ideally, reconciling your nonprofit bank statement is a task best accomplished through a specialized true fund accounting software. However, understanding the principles of bank reconciliation accounting may lead to more accurate transaction entries and a cash reconciliation process that could just make you smile.

What Is A Bank Reconciliation?

When it comes to how to do cash reconciliation for your nonprofit, the process is really about comparing your organization’s cash records to the monthly statement provided by the bank. Cash records, also known as your cash general ledger (or GL), contain a list of all cash transactions during the month. Deposits to the bank will be debits to the cash general ledger account, while checks will be credits to the cash general ledger. Bank service fees and check fees are separate cash withdrawal items that should be entered as credits to the cash account.

How Timing Differences Create Discrepancies

In a perfect world, any differences between the cash general ledger and bank statement would be merely timing differences. As an example, an outstanding check written on July 31 will show up in the July cash GL, but it may not appear on the bank statement until August.

Similarly, deposits made to the bank at 5:00 p.m. on the last day of the month will be listed on the cash GL as that month’s transactions, but they will most likely not be listed on the bank statement until the next month. This discrepancy is known as a “deposit in transit,” a common timing difference between the cash GL and the bank statement. Timing differences can cause your nonprofit a few accounting headaches, but these discrepancies are usually easily spotted and addressed during cash reconciliation in a fund accounting software.

Steps to Reconciling the Bank Statement

First, start with the balance on the bank statement.

 Bank Balance July 31
 Add  Deposits in Transit
 Deduct  Outstanding checks
 Add or Deduct  Bank Errors
 Total  Adjusted/Corrected Bank Balance

Second, obtain the cash balance from the general ledger.

 Cash Balance from General Ledger July 31
 Deduct  Bank Service Charges
 Add  Interest paid by the bank on your cash balance
 Add or Deduct  Errors in the organization’s cash account
 Total  Adjusted/Corrected Cash Balance

Third, compare the adjusted totals.

If they are not the same, identify the differences so that corrections and adjustments can be entered into the correct place.

Finally, prepare the appropriate journals for the corrections and adjustments.

A good rule is to enter the item where it is missing. For example, interest that appears on the bank statement will need to be entered in the cash general ledger. Deposits in transit or outstanding checks are simply noted as adjustments to the bank balance. Those items will appear on the next statement but will already be included in the cash balance.

Bank reconciliation is an important tool in protecting your nonprofit’s assets. In our imperfect world, mistakes happen. Reconciling the bank statements on a regular basis allows for mistakes to be found and corrected so you’re left with accurate data for reporting. For best results, use a true fund accounting software intended for nonprofits.

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