4.3 The Monthly Bank Reconciliation & Reconciling Journal Entries
Key Takeaways
- Only book-side reconciling items—NSF checks, bank charges, interest, EFT amounts, and company errors—are journalized; deposits in transit, outstanding checks, and bank errors are not.
- Harbor View's May 31 example proves both sides to adjusted cash of $8,742.40 from a bank balance of $8,507.55 and a book balance of $8,634.55.
- Deposits in transit are added to the bank statement balance; outstanding checks are subtracted from the bank statement balance.
- An NSF check is recorded as a debit to Accounts Receivable and a credit to Cash; it is not a bank-side-only tick mark.
- Balance-sheet cash is the adjusted cash figure after reconciling journal entries post, not the unadjusted bank-statement total.
Why the monthly rec is a Test 2 skill, not optional paperwork
AIPB's error-correction skill list says you will do the monthly bank reconciliation and record the related journal entries. On CB Part 1, Test 2, that rec sits in the same one-hour Prometric sitting as general-ledger error hunting, with a 75% passing grade on the test. The rec is how a working bookkeeper finds cash errors that the trial balance will never see: a deposit still in transit, a check the vendor has not cashed, a customer check that bounced, an ACH the firm authorized but never journalized, or a bank encoding mistake.
This OpenExamPrep section is independent practice. It is not an AIPB form and does not claim official approval. Accrual and deferral corrections remain Chapter 5—missed wage accruals do not appear on a bank statement because no cash moved. Do not skip this rec to jump ahead. If Cash is wrong, the balance sheet is wrong no matter how pretty the adjusted trial balance looks.
Two numbers almost never match on the last day of the month, and that is normal:
- Balance per bank — ending cash on the bank statement.
- Balance per books — ending balance in the Cash general-ledger account.
The rec's job is to prove both sides to one adjusted cash figure. That adjusted amount, after book-side journal entries post, is the Cash number that belongs on the balance sheet.
Twelve-step monthly bank reconciliation
Work the rec in a fixed order so you do not journalize an outstanding check or forget an NSF memo.
- Gather the cut-off packet. Bank statement, canceled-check images, deposit tickets, debit and credit memos, ACH/EFT notices, and last month's rec (for outstanding items that should clear this month).
- Enter the bank statement ending balance on the rec form.
- Enter the Cash general-ledger ending balance on the rec form.
- Tick deposits. Match statement credits to the cash receipts journal. A prior-month deposit in transit that appears on this statement should tick off. Unticked current-period deposits are deposits in transit; add them to the bank side.
- Tick paid checks and electronic disbursements. Match statement debits to the cash disbursements journal. Prior-month outstanding checks that cleared should tick off. Unticked book checks are outstanding checks; subtract them from the bank side.
- List bank credits not on the books. Interest earned, EFT collections, note collections, and credit memos. Add them on the book side. These will be journalized.
- List bank debits not on the books. NSF checks, service charges, EFT payments, automatic loan payments, and debit memos. Subtract them on the book side. These will be journalized.
- Compare amounts on ticked items. If the bank encoded a check at the wrong amount, that is a bank error (bank side; notify the bank; no company journal entry unless the error was actually yours). If the company journalized a check or deposit at the wrong amount, that is a book error (book side; journalize).
- Compute adjusted bank cash. Statement balance + deposits in transit − outstanding checks ± bank errors.
- Compute adjusted book cash. Ledger balance + interest and collections − NSF, charges, and unrecorded payments ± book errors.
- Prove the two adjusted amounts are equal. If they are not, re-foot the rec, re-tick deposits and checks, and look for a remaining outstanding item or a math error. Do not force-plug a difference.
- Journalize book-side items only, post to Cash, and file. After posting, the Cash ledger must equal adjusted cash. Staple or attach the rec to the statement.
| Item | Bank side | Book side | Company journal entry? |
|---|---|---|---|
| Deposit in transit | Add | — | No |
| Outstanding checks | Subtract | — | No |
| Bank charged us for another customer's item | Add back | — | No — notify the bank |
| Bank credited us in error | Subtract | — | No — notify the bank |
| NSF customer check | — | Subtract | Yes — debit AR, credit Cash |
| Bank service charge | — | Subtract | Yes — debit expense, credit Cash |
| Interest earned | — | Add | Yes — debit Cash, credit Interest Revenue |
| EFT collection of a note | — | Add | Yes — debit Cash; credit Notes Receivable and Interest Revenue |
| EFT payment (utilities, loan, insurance) | — | Subtract | Yes — debit expense or payable, credit Cash |
| Book understated a check | — | Subtract | Yes — credit Cash for the missing amount |
| Book overstated a deposit | — | Subtract | Yes — credit Cash |
Rule you can quote: if the bank does not know about it yet, it belongs on the bank side and you do not journalize it. If the books do not know about it yet, it belongs on the book side and you do journalize it. Bank errors are the bank's books, not yours.
Prior-month items: April's deposit in transit that appears on the May statement is not a May deposit in transit. April's outstanding Check 1832 that cleared in May is not outstanding at May 31. April's Check 1839 that still has not cleared remains outstanding and must appear on the May rec until it hits a later statement.
Full worked example — Harbor View Landscaping, May 31, 2026
Harbor View Landscaping uses one checking account. After posting May's cash receipts and disbursements, the Cash general-ledger balance is $8,634.55. The May 31 bank statement balance is $8,507.55. Those two figures are supposed to disagree until the rec is done. They are not a sign that someone already failed; they are the starting pair.
Information from ticking and memos
Deposits. The cash receipts journal shows a May 31 night drop of $1,250.00 that does not appear on the statement. April's $640 in-transit deposit did appear on May 3 and has already been ticked. May's only deposit in transit is $1,250.00.
Outstanding checks. Tick every statement debit to the cash disbursements journal, including checks that were outstanding on April 30. A prior-month outstanding check that cleared in May is ticked off and is not outstanding at May 31. A prior-month check that still has not cleared would remain on the outstanding list; in Harbor View's May packet the only April leftover, Check 1832, cleared on May 8.
| Check | Payee | Amount | Status at May 31 |
|---|---|---|---|
| 1832 (April outstanding) | Glass Repair | $210.00 | Cleared May 8 — tick off; do not subtract again |
| 1844 | Cedar Supply | $318.75 | Not on statement — outstanding |
| 1851 | Metro Fuel | $642.00 | Not on statement — outstanding |
| 1857 | County Dump | $89.40 | Not on statement — outstanding |
$318.75 + $642.00 + $89.40 = $1,050.15 outstanding.
Bank error. The statement includes a $35.00 check drawn by Harbor View Dental, a different customer of the same bank. The bank deducted it from Harbor View Landscaping. Add $35.00 on the bank side and call the bank. Do not expense it.
NSF. Customer Rivera’s $220.00 check, deposited May 28, was returned. Subtract on the books; restore the receivable.
Bank service charge. $18.50. Subtract on the books.
Interest. The statement credits $4.15 of checking interest. Add on the books.
EFT collection. The bank collected a $500.00 note receivable plus $25.00 interest, total $525.00, and credited the account. Harbor View had not recorded the collection. Add on the books.
EFT payment. An authorized utility draft of $146.80 hit the account. Harbor View had not recorded it. Subtract on the books.
Book error. Check 1849 to a supplier was $273.00. The cash disbursements journal recorded $237.00 (3 and 7 transposed). Cash on the books is $36.00 too high because the credit to Cash was $36.00 too small. Subtract $36.00 on the books. $273 − $237 = $36, and $36 ÷ 9 = 4, which is the same 9-test you used on the trial balance, now appearing inside a rec.
Bank side — prove to adjusted cash
| Amount | |
|---|---|
| Balance per bank statement, May 31 | $8,507.55 |
| Add: Deposit in transit, May 31 | 1,250.00 |
| Add: Bank error (other customer's $35 check) | 35.00 |
| Less: Outstanding checks (1844, 1851, 1857) | (1,050.15) |
| Adjusted bank cash | $8,742.40 |
Arithmetic check: $8,507.55 + $1,250.00 = $9,757.55; $9,757.55 − $1,050.15 = $8,707.40; $8,707.40 + $35.00 = $8,742.40.
Book side — prove to the same adjusted cash
| Amount | |
|---|---|
| Balance per books (Cash GL), May 31 | $8,634.55 |
| Add: Interest earned | 4.15 |
| Add: EFT note collection ($500 + $25 interest) | 525.00 |
| Less: NSF check — Rivera | (220.00) |
| Less: Bank service charge | (18.50) |
| Less: EFT utilities | (146.80) |
| Less: Book error on Check 1849 ($273 recorded as $237) | (36.00) |
| Adjusted book cash | $8,742.40 |
Arithmetic check: $8,634.55 + $4.15 + $525.00 = $9,163.70; $9,163.70 − $220.00 = $8,943.70; $8,943.70 − $18.50 = $8,925.20; $8,925.20 − $146.80 = $8,778.40; $8,778.40 − $36.00 = $8,742.40.
Both sides equal $8,742.40. That is the proof. If they failed to meet, you would return to Steps 4–8 and re-foot rather than invent a plug.
Reconciling journal entries — book side only
No journal entry for the deposit in transit, the outstanding checks, or the bank's $35 encoding error.
Interest earned
| Account | Debit | Credit |
|---|---|---|
| Cash | 4.15 | |
| Interest Revenue | 4.15 |
EFT collection of note receivable
| Account | Debit | Credit |
|---|---|---|
| Cash | 525.00 | |
| Notes Receivable | 500.00 | |
| Interest Revenue | 25.00 |
NSF check — Rivera
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable — Rivera | 220.00 | |
| Cash | 220.00 |
Bank service charge
| Account | Debit | Credit |
|---|---|---|
| Bank Charges Expense | 18.50 | |
| Cash | 18.50 |
EFT utility payment
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | 146.80 | |
| Cash | 146.80 |
Book error on Check 1849 (additional $36 credit to Cash; debit Accounts Payable if the original recording was a payment on account)
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | 36.00 | |
| Cash | 36.00 |
Cash T-account after posting
| Debit | Amount | Credit | Amount |
|---|---|---|---|
| Balance May 31 | 8,634.55 | NSF Rivera | 220.00 |
| Interest | 4.15 | Service charge | 18.50 |
| EFT note collection | 525.00 | EFT utilities | 146.80 |
| Check 1849 correction | 36.00 | ||
| Balance after rec | 8,742.40 |
Debits $8,634.55 + $4.15 + $525.00 = $9,163.70. Credits $220.00 + $18.50 + $146.80 + $36.00 = $421.30. $9,163.70 − $421.30 = $8,742.40, which matches adjusted bank cash. Step 12 is complete when this ledger balance is the one you can point to on the rec.
Exam traps
- Journalizing outstanding checks or deposits in transit. Those items are timing differences on the bank's records, not new company transactions.
- Expensing a bank error. If the bank took $35 that belongs to another customer, you add it on the bank side and call the bank. Debiting Bank Charges would understate Cash after the bank corrects itself.
- Using the unadjusted statement balance as balance-sheet cash. Harbor View's statement says $8,507.55; true cash is $8,742.40.
- Treating NSF as a bank-side-only tick. NSF has already reduced the bank balance; your books still show the deposit, so you must credit Cash and put the customer back in Accounts Receivable.
- Forgetting that an EFT collection of a note includes interest. Crediting the entire $525.00 to Notes Receivable would leave a $25.00 credit stuck on the note after the principal is gone.
- Recording the Check 1849 fix as $273.00 instead of $36.00. The books already credited Cash $237.00; you only need the missing $36.00.
Electronic statements use the same twelve steps. ACH receipts are deposits; ACH payments are disbursements. Positive-pay and other bank-side fraud tools are Chapter 13; the rec is detection after the fact, not a substitute for those controls.
Current-period accrual and deferral errors—wages never accrued, prepaid insurance left in expense, deferred fees taken to revenue too early—are Chapter 5. They will not print on the bank statement. You still complete this rec every month so Cash is proved before you start reconstructing adjusting-entry mistakes.
Which reconciling items require a journal entry on the company's books?
Harbor View Landscaping's May 31 bank statement balance is $8,507.55 and the Cash general-ledger balance is $8,634.55. Deposits in transit are $1,250.00; outstanding checks total $1,050.15; the bank charged this account $35.00 for another customer's check. Book items not yet recorded: NSF $220.00, service charge $18.50, interest $4.15, EFT note collection $525.00, EFT utility $146.80, and a book error that understated a check by $36.00. What is adjusted cash?
The bank deducted $35 belonging to another customer from Harbor View Landscaping's account. How does the May reconciliation treat that item?