A manage procedure to establish and verify the exactly cash balance via to know of errors, irregularities, and adjustments
">bank reconciliation. In business, every bank statement must be promptly reconciled by a human not otherwise involved in the cash receipts and also disbursements functions. The reconciliation is necessary to determine errors, irregularities, and also adjustments for the Cash account. Having actually an independent human being prepare the reconciliation helps create separation of duties and also deters fraud by inquiry collusion because that unauthorized actions.

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There are plenty of different styles for the reconciliation process, however they all achieve the exact same objective. The reconciliation compares the quantity of cash displayed on the monthly
The file received indigenous a financial institution which summarizes deposits and also other credits, and checks and other debits come a bank account
">bank statement
(the file received indigenous a financial institution which summarizes deposits and other credits, and checks and also other debits) through the lot of cash reported in the basic ledger. These two balances will commonly differ as presented in the complying with illustration:



Differences are caused by items reflect on company records yet not yet taped by the bank. Examples encompass
Receipts gotten in on agency records but not yet posted by the bank
">deposits in transit
(a receipt entered on agency records yet not handle by the bank) and
Checks gone into on agency records but not however cleared through the bank
">outstanding checks
(checks created which have not cleared the bank). Other differences relate come items noted on the bank statement yet not recorded by the company. Examples encompass non-sufficient accumulation (
Non-sufficient accumulation check; a customer inspect returned for absence of funds (a "hot check")
" >NSF
) checks (“hot” checks formerly deposited yet which have actually been returned for nonpayment), bank service charges, notes receivable (like an account receivable, but more “formalized”) built up by the financial institution on instead of of a company, and interest earnings.

The adhering to format is common of one used in the reconciliation process. Note that the balance every the bank statement is reconciled come the “correct” quantity of cash; likewise, the balance per agency records is reconciled to the “correct” amount. These amounts must agree. Once the correct readjusted cash balance is satisfactorily calculated, journal entries should be all set for all items established in the reconciliation the the finishing balance per company records to the exactly cash balance. These entries offer to document the transactions and also events which impact cash yet have no been previously journalized (e.g., NSF checks, financial institution service charges, interest income, and so on).



The following pages encompass a comprehensive illustration of the financial institution reconciliation process. Begin by closely reviewing the bank statement for The handle Shop found below. Then look at the company’s inspect register spreadsheet that follows. Information found on that spreadsheet would correlate specifically to task in the company’s Cash account in ~ the general ledger.

The following additional information must likewise be considered:

Check #5454 was composed in June but did not clear the financial institution until July 2. There were no various other outstanding checks, and no shop in transit in ~ the finish of June.The EFT (electronic accumulation transfer) ~ above July 11 relates come the monthly utility bill; the tackle Shop has authorized the utility to breeze its account directly each month.The tackle Shop is optimistic that they will recoup the full amount, including the organization charge, on the NSF examine that was given to them during the month.The bank gathered a $5,000 keep in mind for The tackle Shop, add to 9% interest ($5,450).The handle Shop’s credit card clearing agency remitted accumulation on July 25; the handle Shop got an email an alert of this posting and simultaneously journalized this cash receipt in the audit records.The tackle Shop make the deposit that $3,565.93 late in the job on July 31, 20X3.The finishing cash balance, every the company general ledger, to be $47,535.30.

Be conscious that conducting a successful bank reconciliation requires mindful attention come every detail. After assessing the financial institution statement, inspect register, and extr information, continue to verify each component in ~ (1) the balance per financial institution statement to the exactly cash balance and also (2) the balance per agency records come the correct cash balance.

Bank Statement


Check Register


Below is the July reconciliation that the balance per bank statement come the correct cash balance.


The reconciliation that the balance per agency records to the exactly cash balance is gift below. This reconciliation will trigger various adjustments to the Cash account in the agency ledger.


The established items necessitated enhancing cash through $4,968.21 ($52,503.51 correct balance, much less the balance per company records that $47,535.30). Keep in mind that the $462.06 debit to accounts Receivable indicates that The handle Shop is walk to effort to collection on the NSF check and also related charge. The interest income of $569.34 shows that posted by the financial institution ($119.34) to add the $450 on the accumulated note.


This reconciliation example demonstrates the importance of the process, without which accounting records would soon end up being unreliable.

Debit Cards

Another example of things that could influence the bank statement yet not yet be videotaped on company records relates to the use of bank “debit cards.” A financial institution
Transactions are equivalent to an electronically generated examine that outcomes in an practically immediate withdrawal of funds.
">debit card
transaction is indistinguishable to an electronically produced check however it outcomes in an nearly immediate withdrawal of funds. Together withdrawals would be noted on the financial institution statement individually.

Great care is vital to record each debit card transaction into the audit records, and also appropriate approval and documentation have the right to be problematic. As soon as debit cards room used, the reconciliation procedure is often complicated because extr withdrawals will certainly be found on the financial institution statement the still need to be taped on the agency records.

Proof the Cash

Many companies prepare a reconciliation just like that illustrated. However, this strategy leaves one gaping feet in the control process. What if the bank statement consisted of a $5,000 check to one employee near the beginning of the month, and also a $5,000 deposit by that employee close to the end of the month (and these amounts were not taped on the company records)? In various other words, the employee took the end an innocuous “loan” for a while. The reconciliation would not reveal this unauthorized activity because the ending balances space correct and also in agreement. To conquer this deficiency, some carriers will mediate not just the beginning and also ending balances, but additionally the full checks every the bank statement to the total disbursements every the company records, and the total deposits every the financial institution statement to the total receipts ~ above the company accounts. If a difficulty exists, the totals ~ above the financial institution statement will certainly exceed the totals every the agency records because that both receipts and disbursements. This included reconciliation an approach is termed a
A detailed financial institution reconciliation that verifies not only beginning and end balances, but likewise validates deposits and withdrawals during the month
">proof of cash
. The is very recommended whereby the volume of transactions and amount of money involved is very large.

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Also illegal is “kiting” whichoccurs when one opens up numerous bank accounts at assorted locations and then proceeds to write checks ~ above one account and deposit them to another. In turn, checks are written on that account, and deposited to yet another bank. And, over and also over and over. Every of the financial institution accounts may appear to have actually money; but, it is illusionary, due to the fact that there are countless checks “floating” about that will hit and reduce the accounts. Somewhere in the process the perpetrator makes a cash withdrawal and also then vanishes. The is why one will regularly see financial institution notices the deposited funds cannot be withdrawn for number of days. Such restrictions are intended to make certain that a deposit clears the financial institution on which it is drawn before releasing those funds. Kiting is complex and illegal. Intensified electronic clearing procedures adopted by financial institutions have make kiting much more daunting to accomplish.