A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee owed for the printing of checks, a fee for the handling of a check that was returned because of insufficient funds, a transfer of funds from the bank account to another account at the bank, and so on.

The charge, decrease, or reduction is likely called a debit memo because the checking account balance is a liability on the bank’s books. This is the case because the bank has your money as one of its assets and it has your account balance as one of its liabilities. When the bank decreases your account balance, it is reducing its liability. Liabilities are reduced with a debit entry. That also explains why the bank credits your account when your account balance is increased.

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Next, look at the general ledger account that is associated with the bank statement. Let’s assume it is the Cash account. Be certain that the Cash account shows items that appear on the recent bank statements. For example, Have the bank service charges been entered in the Cash account? Have the electronic transfers been entered? If not, you will need to make those entries. You may have to go back to earlier bank statements and enter those amounts as well.

Eventually, you need to get the August 31 balance in the Cash account to be equal to the adjusted balance per bank. If the difference is not a significant amount, you can debit or credit the Cash account for the amount necessary for it to agree to the adjusted balance per bank. I would put the same amount into an income statement account such as Difference per Bank Rec. Keep a copy of your documentation and begin a file entitled Bank Reconciliations.

When the September 30 bank statement arrives, prepare another bank reconciliation. Using a copy of the August 31 listing of outstanding checks, cross off the checks that cleared on the September bank statement. Prepare a September 30 listing of outstanding checks beginning with the checks not crossed off on the August 31 copy, and then add the checks written in September that did not clear on the September bank statement. The total of the outstanding checks as of September 30 should be deducted from the bank statement balance of September 30 to arrive at the adjusted balance per bank as of September 30. Be sure to enter into the Cash account the September bank service charge and other items appearing on the bank statement that have not yet been entered in the Cash account. This adjusted balance in the Cash account as of September 30 should be the same as the adjusted balance per bank as of September 30. If there is a difference, you must identify it and make any necessary adjustments.

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I recall being asked to reconcile the general ledger account Freight Payable. What I needed to do was provide documentation that the balance in Freight Payable was proper. I proceeded to look at the shipments of recent sales and then determined how much we would be obligated to pay for the freight on those sales. We then adjusted the balance in Freight Payable to my documented amount. This reconciliation was done to have the correct account balance and to provide the outside auditors with documentation which could easily be reviewed.

I also reconciled the balance in Utilities Payable by computing the daily cost of each utility that the company used. The cost per day was then multiplied by the number of days since the last meter reading date shown on the utility bills already entered in our accounting system. We then adjusted the Utilities Payable account balance to be equal to the documented amount.

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It might be helpful to recall the bank reconciliation rule: Put it where it isn’t. The old check, which you had voided, is now on the bank statement, but it is not in the cash account. Therefore, you need to put the check amount into the general ledger.

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The general ledger account has always been correct, because the amount of the check reduced the general ledger account balance at the time the check was written and recorded.

The problem was the previous bank statements. The bank statement balances were too high since the check had not yet cleared the bank checking account. That’s why we subtract the amount of the outstanding checks from the bank statement balance. Now that the bank statement balance has been reduced by the check clearing the bank account, there is no longer a need to further subtract the amount of the check as outstanding.

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When a check is written, it will be recorded as a credit to the Cash account in the company’s general ledger. Whether the check clears the bank or not, the company’s Cash account balance is proper. The Cash account balance will be presented on the balance sheet without any adjustment for unpresented or outstanding checks.

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However, if a company voids one of its outstanding checks, the company will need to make an entry to its general ledger. The entry will debit Cash in order to increase the account balance. The credit portion of the entry will likely be to the account that was originally debited when the check was issued.

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The bank reconciliation might reveal that some revenues and/or receipts were electronically deposited into the bank account but were not yet recorded in the accounting records. Likewise, there might be some expenses and/or payments that were deducted electronically from the bank account, but were not yet entered into the company’s accounts. Further, the bank reconciliation might reveal some errors in the transactions already recorded in the company’s general ledger.

To save time and to improve internal control, have the bank reconciliation be performed by someone other than the person writing the checks and/or recording amounts in the general ledger.

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AccountingCoach.com also has three FREE inteactive Crossword Puzzles on this topic.

If an item is on the books but has not yet appeared on the bank statement (outstanding checks, deposits in transit), the items are entered as an adjustment to the balance per bank statement. Outstanding checks are a deduction to the balance per bank; deposits in transit are an addition to the balance per bank.

If an item is on the bank statement but has not yet been entered on the books, the items are entered as an adjustment to the balance per books. Bank service charges, check printing charges, and other electronic deductions that are not yet recorded on the books are deductions from the cash balance on the books. Electronic deposits not yet on the books are added to the cash balance per books.

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When preparing the balance sheet, the negative balance in the cash account should appear as a current liability (Checks Written in Excess of Cash Balance) instead of reporting the negative cash as an current asset.

A negative cash balance in the general ledger (on the balance sheet) does not mean that the company’s bank account is overdrawn. For example, if a company writes checks for $100,000 and mails them at the end of the day to suppliers in another state, those checks might not clear the bank account for four days. The general ledger account might show a negative $40,000 but the bank’s checking account might be reporting a positive balance of $60,000. If the company deposits more than $40,000 tomorrow morning, the bank balance will not show an overdraft because the bank balance will be large enough to pay the $100,000 of checks when they clear the company’s checking account in a few days.

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Often the depositor’s bank will also charge a fee for handling the returned item. Since that fee is automatically deducted on the bank statement, the amount needs to be deducted from the depositor’s Cash account. The journal entry will be a credit to Cash and a debit to another account such as a receivable account.

A simple rule is that the adjustment must go where the item is not yet present. Since the return item and the related bank fee are already on the bank statement, the adjustment must go to the general ledger accounts.

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A common example of a bank reconciliation item that will require a journal entry is the bank service charge. The bank service charge is often shown on the last day of the bank statement. Since it is on the bank statement, but not yet on the company’s books, you will need to credit Cash and to debit an expense such as Bank Charges or Milscellaneous Expense.

Other examples of items that are on the bank statement, but not yet on the books include check printing charges, fees for returned checks, correction by the bank for errors in the company’s deposits, collections made by the bank of the company’s notes receivable, interest earned on bank accounts, miscellaneous bank fees, loan payments and other automatic withdrawals from the bank account.

If the bank made an error on the bank statement, you need to notify the bank so that the bank can make a correcting entry.

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(1) A deposit in transit on the bank reconciliation refers to the cash and checks that have been received by a company as of the ending date of the bank statement, but the cash and checks were not deposited in time for them to appear on the bank statement.

To illustrate deposits in transit, let’s assume that your company’s accounting period ends on the last day of each month and that your bank statement also ends (or “cuts off”) on the last day of each month. When you receive the bank statement ending on January 31, it is likely that its balance will not agree with the January 31 balance in your company’s general ledger. One reason for the difference could be that the cash and checks received from customers on January 31 were deposited at the bank too late in the day. (After a specified time on January 31, the bank will record the deposits as of the next business day causing them to appear on the February bank statement.) Another example of a deposit in transit involves a retailer that is open until 9 p.m. on January 31 and deposits the receipts on the morning of February 1. The transactions right up to closing time on January 31 are properly recorded in the company’s general ledger as of January 31. However, the deposit will appear on the February bank statement. Since the money from January 31 is indeed part of the company’s cash and sales on January 31, the company’s general ledger is correct, but the bank statement balance will need to be increased as part of the bank reconciliation process.

(Items that are subtracted from the balance per bank include outstanding checks, and bank errors that when corrected will reduce the bank balance.)

(2) Bank errors involve amounts that were recorded incorrectly by the bank. For example, if a company wrote a check for $89 but the bank coded the check as $98, the bank statement balance will be too low. (The bank deducted $9 too much from the account, and therefore, the bank owes the customer $9.) When the bank makes the correction, the bank balance will increase by $9.00. This adjustment should appear on the bank reconciliation as an addition to the balance per bank.

If a company deposits $97 and the bank records the deposit as $79, the bank added $18 too little into the account…the bank owes the company $18. When the bank makes the correction, the the bank statement balance will increase by $18.00. The company’s general ledger has the correct amount recorded, but the bank has the incorrect balance on the bank statement. Hence the balance per bank needs to be increased by $18.

Tip: For determining whether a bank error will be an addition or a deduction on the bank reconciliation, be sure to think in terms of the change in the balance of the bank account. Both of the bank errors described above caused the bank balance to be too low. The correction of each of these errors will result in an increase to the balance per bank.

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If the bank statement shows a debit memo of $25 for a service fee, the bank statement balance was decreased by $25. As part of the bank reconciliation process the following entry must be made if the item has not yet been recorded in the company’s records: debit Bank Fee Expense or Miscellaneous Expense $25 and credit Cash $25. The company’s Cash account needs to be credited because this company’s asset account decreased.

The reason the bank used “debit” to decrease the company’s checking account is that its customers’ checking account balances are liabilities for the bank. (The bank’s cash was debited when customers deposited money and the bank’s liability account Demand Deposits or Checking Account Deposits was credited.) When the bank pays a customer’s check, the bank’s cash is reduced and the bank’s liabilities are reduced. The bank records this with a credit to Cash and a debit to Demand Deposits.

Learn more about the bank’s debits and credits by reading Part 4 of Debits & Credits.

The journal entries for the bank fees would debit Bank Service Charges (or Miscellaneous Expense if the amounts are insignificant) and a credit to Cash. The journal entry for a customer’s check that was returned due to insufficient funds will debit Accounts Receivable and will credit Cash. Interest earned by the company will be recorded with a debit to Cash and a credit to Interest Revenue (or Interest Income).

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The bank reconciliation for a company’s checking account begins with the company noting the balance per the bank statement and then making some notations about that balance. For example, the balance on the bank statement is probably not the amount that appears in the company’s records. In all likelihood the checks written by the company in the days immediately before the date of the bank statement will not have cleared (been deducted from) the checking account. These are called outstanding checks. Another possibility is that the company received money on the closing date of the bank statement and properly recorded the amount in its records. However, the money was deposited into the bank too late in the day and will appear on the next bank statement. This is known as a deposit in transit. Let’s begin the bank reconciliation by assigning some amounts to the items just mentioned:

Balance per bank statement at October 31 $6,442.56; outstanding checks as of October 31 $3,400.00; deposits in transit at October 31 $1,000.00. The adjusted balance per the bank statement on October 31 is $4,042.56 ($6,442.56 + $1,000.00 - $3,400.00).

Next, the bank reconciliation requires that the amount in the company’s records (for this bank statement account) be noted. In all likelihood the amount in the company’s records will not agree with the adjusted bank amount. One explanation could be the bank fees that the bank took out of the checking account, but the fees were not yet recorded in the company’s records. A common example is the bank service charge for maintaining the checking account, handling returned checks, and check printing fees. The bank might also deduct loan payments or process other transactions that the company has not yet entered into its records. Let’s illustrate the company’s adjusted balance with some amounts:

Balance per the company’s records (account register, general ledger account) $4,340.56; bank service charge $63.00; check printing charge $120.00. The adjusted balance per the company’s records, or per books, is $4,157.56 ($4,340.56 - $63.00 - $120.00).

If the adjusted balance per the bank agrees with the adjusted balance per the books, the bank reconciliation is completed. In our example, the adjusted balance per the bank is $4,042.56 and the adjusted balance per the company’s books is $4,157.56. The difference of $115.00 means that the bank reconciliation is not completed. The $115.00 difference must be identified. Finding the difference is likely to be tedious, but it must be done. After all differences have been identified, any adjustments to the company’s balance must be entered into the company’s records with a journal entry. It is the reconciled, adjusted balance that is to be reported on the company’s balance sheet.

As mentioned above, performing a bank reconciliation is necessary for the accuracy of the accounting records and for the company’s financial statements. Bank reconciliations are also associated with a company’s internal controls over cash. If the bank reconciliation is performed by someone other than the authorized check signers and record keepers, the company has improved its internal control over cash.

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For example, a retailer might receive $5,000 on Saturday (June 29) and $3,000 on Sunday (June 30). The money is deposited each evening in the bank’s night depository. The store’s Cash should be debited on each of those days for the respective amounts. However, the bank statement will report the $8,000 as a deposit on Monday, July 1, when the bank processes the items from the night depository.

When reconciling the bank statement dated June 30, the store will have to increase the balance on the bank statement by $8,000 for the deposits in transit. (Recall that the $8,000 is rightfully reported on the company’s books as of June 30, but the $8,000 is not recorded on the bank statement as of June 30.)

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On Monday, June 5, the money is counted and is deposited into the church’s bank account. The transaction to record the cash and the revenues (remember double entry) should be dated Sunday, June 4, since that is the day of the transaction—the day the church received the money.

The day the money is deposited into the bank account is not the proper date of the transaction. The accounting records should report that the money was received on Sunday, June 4.

Some software will allow a person to go into a previous period’s activity (as well as the current period’s activity) and remove the voided check or to change the amount to zero. This too will increase the cash balance and will remove the debit from the account originally debited when the check was recorded.

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Here are several examples to show how it helped Herb and others…

The bank statement already shows the bank service charge. However, the company usually doesn’t know the amount of the service charge until the bank statement arrives. So at that point the service charge is not in the company’s general ledger. To reconcile the bank statement with the general ledger Cash account, you will need to enter the bank service charge into the Cash account. Therefore, in the bank reconciliation process the bank service charge will be listed as an adjustment to the books (to the Cash account). As my neighbor learned, you put the service charge where it ain’t.

Next let’s talk about outstanding checks. Outstanding checks are checks that have been written by the company, but these checks have not yet cleared the bank. (They have not yet made their way to the company’s bank account on which they were drawn or written.) Outstanding checks, like all checks written, are already recorded on the company’s books, but they are not on the bank statement. Guess what…Put them where they ain’t. Outstanding checks will be listed as an adjustment to the balance per the bank.

Deposits in transit are already on the books, but they are not on the bank statement. Deposits in transit will be an adjustment to the balance per bank.

I hope you found Herb’s tip to be helpful.

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