Introduction to Bank Reconciliation in Accounting

Study Notes

A company's cash includes the money in its checking account(s) and requires internal controls to safeguard this critical asset.
Internal controls include separating accounting duties, depositing all receipts into the company's checking account, paying all bills through the checking account, and having an independent person routinely prepare a bank reconciliation.
The purpose of the bank reconciliation is to ensure the company's general ledger Cash account is complete and accurate.
The bank reconciliation also provides a way to detect potential errors in the bank's records.

The bank reconciliation process requires adjustments based on differences between the company's and bank's records.
These adjustments are added or subtracted from the company's general ledger Cash account or the bank's checking account balance.
With online banking, a company can prepare a bank reconciliation throughout the month and verify its checking account balance more frequently.

A company should have a separate general ledger Cash account for each of its checking accounts.
The balances in asset accounts are increased with a debit entry, and when a company receives money, it debits its general ledger asset account Cash and credits another account.
When a company writes a check, it credits its general ledger Cash account and debits another account.

When a bank customer deposits money into its bank checking account, the bank's asset Cash is increased with a debit entry, and the bank's liability Customers' Deposits is increased with a credit entry.
The bank's liability has increased because the bank has the liability/obligation to return the customer's checking account balance to the customer on demand.
When the bank increases a customer's/depositor's checking account balance, the banker might say that the depositor's account has been credited.

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