Why Don't I Balance

For years now, Seymour Kaufman has taught a course in Washington, D.C. to help candidates prepare for the Certified Public Accounting exam. He tells the following story of how wrong a bank reconciliation can go.

One of Seymour's students passed the Maryland examination the first time with one of the highest scores in its history. He came to Seymour afterward and said, "you know, now that I've passed the exam, I have to admit that I've never actually seen a set of books. Do you know where I could get some hands-on experience?"

Seymour introduced him to a friend who was the senior partner of a local accounting firm. Naturally, the first assignment they gave him was a bank reconciliation. The senior partner came in at lunchtime to check on him. He said, "I think I'm just about done, but I want to check some things out first". At the end of the day he told the partner he was having some problems with it, but he wanted to work through it himself.

By noon the next day, he had to confess he was stumped. The senior partner sat down to see what the problem was - he'd been adding the cheque numbers! Let's hope that's not your problem.

Have you seen our article - Bank Account Reconciliations - How to Do One? It's a good place to start.

1. Confirm that the beginning bank statement balance for this month equals the ending bank statement balance from last month. Sometimes banks post back-dated entries to your account after they've mailed your statement.

3. Confirm that this month's beginning general ledger(or chequebook) cash balance equals the ending cash balance from last month's bank rec. Another entry may have been posted to last month after the bank reconciliation was done.

5. How much is the difference between the balance per the bank (the upper balance) and the balance per the books (the lower balance)? Is the difference evenly divisible by 9? Look at outstanding cheque # 432 on our example bank rec. Suppose we recorded this cheque on our books as $25.36, but we wrote it down on the bank rec as $25.63, transposing the 3 and the 6. When we try to reconcile our books, we would get a difference of $.27 ($.63 minus $.36). The $.27 is evenly divisible by 9. Any difference that is evenly divisible by 9 suggests that there may be a transposition error in our work.

Because the difference is less than a dollar, it also tells you that you only need to look at the cents portion of your outstanding cheques. You don't have to look at any whole dollar cheques because if you transpose $.00 with a $.00 you still get no difference.

Go down the list of outstanding cheques and transpose the pennies numbers and subtract the transposed number from the number listed for the cheque. Which one gives you a difference of $.27 (using our example)? That's a likely culprit. Look up how it was recorded on the previous bank rec or in the general ledger, depending on where you copied it from.

6. Is the difference evenly divisible by 2? It's not so easy to do with computerized accounting systems, but this would imply that a cheque that should have been recorded as a credit was entered as a debit, or a deposit was recorded as a credit instead of a debit.

7. Is the balance per the bank higher than the balance per the books? You may have missed recording an outstanding cheque. If you show deposits in transit, re-check the bank statement to confirm that none of them have cleared the bank.

8. Is the balance per the bank lower than the balance per the books? You may be missing a deposit in transit. You may have included an outstanding cheque that has actually cleared the bank.

9. For each deposit in transit, go back and look to see if it has a "d" beside it. If so, it shouldn't be on the bank rec.

10. Do the same for each outstanding cheque to confirm that it has no "c" or "v" beside it. If it does, take it off your bank rec.

11. If all of the above have failed you, it's time to find out whether it's the deposits or the cheques that have the problem. Here's a trick to help you find out.

All the deposits that cleared the bank, i.e. the total Credits listed on this month's bank statement, should be equal to:

The total deposits in transit from last month's bank rec plus
All the deposits recorded in this month's general ledger minus
The total deposits in transit from this month's bank rec.

Deposits in transit last month            $ 1,000.00
Deposits per this month's general ledger    5,806.69
  Less: deposits in transit this month     (2,075.80)
Credits per bank statement should be        4,730.89
  Less: credits per bank statement         (4,841.68)
Difference                                $(  110.79)

In the above example, you would then review the recorded deposits looking for $110.79 to try to find the problem. If this calculation produces no difference, the problem is not in the deposits.

All the cheques that cleared the bank, i.e. the total Debits listed on this month's bank statement, should be equal to:

The total outstanding cheques from last month's bank rec plus
All the cheques recorded in this month's general ledger minus
The total outstanding cheques from this month's bank rec.

Outstanding cheques last month            $ 1,392.12
Cheques per this month's general ledger     4,467.77
  Less: outstanding cheques this month     (1,512.95)
Debits per bank statement should be         4,346.94
  Less: debits per bank statement          (4,457.73)
Difference                                $(  110.79)

In the above example, you would review the recorded cheques looking for $110.79 to try to find the problem. If this calculation produces no difference, the problem is not in the cheques.

The two examples above both show a difference of $110.79. How could that be? Suppose the bank mistakenly posted a deposit of $110.79 to your account and then reversed it. When you examined the bank statement you saw the bank's mistake and its correction. You probably would not have recorded the erroneous deposit or its correction on your books. However, the $110.79 erroneous deposit is included in the bank statement's total credits, and the $110.79 correction is also included in the bank statement's total debits.

When the difference from the deposits test equals the difference from the cheques test, you've properly picked up all the deposits in transit and outstanding cheques on your reconciliation.

Suppose, though, that you get a difference on the deposits test, you also get a difference on the cheques test, and the differences don't equal. Subtract one difference from the other difference and look for that number.

If, in the above examples, our deposits test difference was $130.29 and our cheques test difference was $110.79, we would look for $19.50. Here's another trick. You know that the bank made an erroneous deposit of $110.79 and then corrected it. Subtract the $110.79 from the deposits test difference and you get $19.50. Subtract the $110.79 from the cheques test difference and you get zero. That tells you to look for the problem in the deposits.

At this point, the best thing you can do is set it aside for awhile. When you come back later and take a fresh view, the answer often pops right out at you.

If that doesn't work, it's probably best to start the reconciliation over again from scratch, re-checking all your numbers and clearing off the deposits and cheques again. Carefully follow the steps in our article "Bank Account Reconciliations - How to Do One".

Why Don't I Balance?