At the end of each month, the cash book is not balanced until a bank statement is received from the bank. The term book balance, which is also used in the bank reconciliation is the amount shown in the company’s general ledger for the bank account. The automatic withdrawal requires a simple journal entry that debits utilities expense and credits cash for $253. After this is done, all those items that are present in the bank statement but are missing from the cash book are entered into the cash book on the last date of the month. Except for the above fact, under normal circumstances, if both the bank and account holder have kept their books properly, the cash book and the bank statement should show identical balances.
The term is most commonly applied to the balance in a firm’s checking account at the end of an accounting period. An organization uses the bank reconciliation procedure to compare its book balance to the ending cash balance in the bank statement provided to it by the company’s bank. The ending balance on a bank statement almost never agrees with the balance in a company’s corresponding general ledger account. After receiving the bank statement, therefore, the company prepares a bank reconciliation, which identifies each difference between the company’s records and the bank’s records. The normal differences identified in a bank reconciliation will be discussed separately. A bank reconciliation begins by showing the bank statement’s ending balance and the company’s balance (book balance) in the cash account on the same date.
The book balance, also known as the ledger balance or accounting balance, refers to the amount of money recorded in a company’s general ledger for a specific account at a given point in time. It represents the net balance after accounting for all transactions, such as deposits, withdrawals, transfers, and other adjustments, that have been posted to the account. The book balance serves as a basis for preparing financial statements and helps organizations monitor their financial position.
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The calculated book balance amount on the Bank Reconciliation Report is calculated automatically by the system. The calculation takes the amount in the Current Balance field in Bank Code Maintenance and either subtracts or adds all documents dated after the ending date on the Bank Reconciliation Report. The adjusted bank balance amount is calculated by taking the amount entered in the Statement Ending Balance field in Reconcile Bank, adding all deposits in transit, subtracting or adding all adjustments, and subtracting all outstanding checks. Banks use debit memoranda to notify companies about automatic withdrawals, and they use credit memoranda to notify companies about automatic deposits. To the bank, however, a company’s checking account balance is a liability rather than an asset. Therefore, from the bank’s perspective, the terms debit and credit are correctly applied to the memoranda.
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The company may sometimes record a deposit incorrectly, or it may deposit a check for which there are not sufficient funds (NSF). If so, and the bank spots the error, the company must adjust its book balance to correct the error. The bank may also charge an NSF fee, which must be recorded in the company’s books. Service charges are charged by the bank for its services in maintaining the checking account, and must be subtracted from the company’s book balance. This may also include a fee for supplying check stock to the company.
Bank and Book Balance Differences
Since the Vector Management Group paid Ad It Up $63 more than the books show, a $63 debit is made to decrease the accounts payable balance owed to Ad It Up, and a $63 credit is made to decrease cash. For this reason, the only recourse is to prepare a statement to reconcile the balance shown by the cash book to the balance shown by the bank statement. Similarly, in the event of an overdraft, the cash book would show a credit balance, but the bank statement would show a debit balance. If an adjustment is entered in the Bank Reconciliation module, this adjustment must be posted to the General Ledger module, so that the two modules balance. The book balance for your cash account at the end of April is $8,500. Book balance indicates the balance of the ledger accounts which has been prepared by the companies for representing the balance of the bank account….
- From this perspective, the book balance can be viewed as the starting point for reconciling the account records held by the bank and the records maintained by the account holder.
- In any situation, the book balance as of a specific date serves as a starting point to determine where discrepancies have occurred since, and make it possible to correct those accounting issues.
- If the company incorrectly recorded a transaction, the book balance must be adjusted on the bank reconciliation and a correcting entry must be journalized and posted to the general ledger.
- When this happens, the bank returns the check to the depositor and deducts the check amount from the depositor’s account Therefore, NSF checks must be subtracted from the company’s book balance on the bank reconciliation.
- Discover the bank reconciliation definition and the purpose of bank reconciliation.
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Explain the difference between book balance and bank balance.
When all differences between the ending bank statement balance and book balance have been identified and entered on the bank reconciliation, the adjusted bank balance and adjusted book balance are identical. Interest income reported on the bank statement has usually not been accrued by the company and, therefore, must be added to the company’s book balance on the bank reconciliation. The final transaction listed on the Vector Management Group’s bank statement is for $18 in interest that has not been accrued, so this amount is added to the right side of the following bank reconciliation. The interest revenue must be journalized and posted to the general ledger cash account.
These differences are formally stated in the bank reconciliation. The balance on June 30 in the company’s general ledger account entitled Checking Account is the book balance that pertains to the bank account being reconciled. (For an individual, the book balance is likely to be the balance appearing in the person’s check register.) It is common for the book balance to not agree with the balance on the bank statement as of the same day. This is the case when there are bank fees or electronic transfers on the bank statement that have not yet been recorded in the company’s general ledger accounts. For example, the bank statement may reveal that a bank service charge was withdrawn from the account on the last day of the month.
This is because of what is known as the float on the funds on deposit. Many banks have a policy of not applying the deposit to the account until the funds clear from the issuing bank. Depending on the nature of the deposit, this float period may take up to three business days. There are multiple differences between the bank balance and book balance.
Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable), monthly utility bills, or other liabilities. Automatic deposits occur when the company’s checking account receives automatic fund transfers from customers or other sources or when the bank collects notes receivable payments on behalf of the company. Also known as a gross balance, a book balance consists of the amount of funds that are on deposit in an account prior to making any type of adjustment to that balance.
Standard section data are selected based on accounts and are grouped by accounts. Banks usually send customers a monthly statement that shows the account’s beginning balance (the previous statement’s ending balance), all transactions that affect the account’s balance during the month, and the account’s ending balance. A deposit is received for the account holder directly by the bank. The account holder may, in many cases, learn of such a direct deposit only on receipt of their monthly statement. Checks deposited by the account holder may have been returned unpaid. Accounting helps in maintaining a chronological and formal record of all the operating transactions of the company or an institute.
The bank balance is the balance reported by the bank on a firm’s bank account at the end of the month. On rare occasions, the bank will have made an error instead, in which case the bank corrects its records and the company’s book balance is not adjusted. The amount of interest earned is recorded in the bank statement, and must be added to the company’s book balance. If the cash book’s balance still differs from the one shown on the bank statement, the difference must be due to the entries present in the cash book but missing from the bank statement. The term bank balance is commonly used when reconciling the bank statement. It is also known as the balance per bank or balance per bank statement.
A check previously recorded as part of a deposit may bounce because there are not sufficient funds in the issuer’s checking account. When this happens, the bank returns the check to the depositor and deducts the check amount from the depositor’s account Therefore, NSF checks must be subtracted from the company’s book balance on the bank reconciliation. The Vector Management Group’s bank statement includes an NSF check for $345 from Hosta, Inc. Therefore, company records may show one or more deposits, usually made on the last day included on the bank statement, that do not appear on the bank statement. These deposits are called deposits in transit and cause the bank statement balance to understate the company’s actual cash balance. Since deposits in transit have already been recorded in the company’s books as cash receipts, they must be added to the bank statement balance.
A bank immediately notifies the account holder if any check is returned unpaid, but such a notification may reach the account holder after the month-end, particularly if the check was returned in the last few days of the month. In practice, the balance in the cash book rarely agrees with the balance in the bank statement. The following are the reasons why disparities may exist between the two. Each summary row is calculated either through a sum of child row amounts or through a specified formula.
This balance might differ from the available balance, which reflects pending transactions, holds, or other adjustments that have not yet been fully processed and posted to the account. Knowing the book balance as of a specific date is important for several reasons. First, it makes it possible to reconcile the records of the bank with the records of the account holder. For businesses that must pay taxes on the outstanding balances within their cash accounts, knowing how much cash is actually present as of a certain day makes it much easier to calculate those taxes. In any situation, the book balance as of a specific date serves as a starting point to determine where discrepancies have occurred since, and make it possible to correct those accounting issues.