Book Balance vs. Bank Balance


Posted By

Apr 10th, 2011

Bank balance example

It is important to reconcile your bank balance at least once a week to know where your company stands financially and to avoid overdraft fees. However, if your company is cutting multiple checks a day, you should consider reconciling your bank account at least once a day.

There is a great chance that your online bank balance does not match with the bank balance on your general ledger.

Here are important terms to know:

Outstanding Checks: These are checks that you have cut, but have not been deposited by your vendors.

Deposit in Transit: Checks that are recorded in your books, but have not been deposited/cleared by the bank.

True Balance: The actual balance after outstanding checks and deposit in transit have been recorded.

Ex. On May 1st, Mr. Smith, the owner of Company ABC, checks his online bank balance which is currently $5,100. He decides to pay a portion of a vendor’s account balance with a $5,000 check. A few weeks later, Mr. Smith receives his bank statement informing him that he has over-drafted his checking account.  After careful examination, Mr. Smith realizes that he forgot to account for the $150 dollar check he wrote to the office supply store. His true balance on May 1st was actually $4,950 and not $5,100. Now Mr. Smith will have to reissue the $5,000 check along with an overdraft penalty fee from his vendor and overdraft fee to his bank.

The above example could have been avoided if Mr. Smith recorded the outstanding check in his bank journal.

Debit memos that might cause a discrepancy between your book balance and your bank balance include:

  • NSF fees
  • Service fees
  • Overdraft fees
  • Interest income
  • Interest expense
  • Bank error
  • Failure to record a transaction
  • Recording the wrong amount
  • Recording a payment as a deposit

By keeping an updated bank journal, you can avoid unnecessary penalties and fees.

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