If you’re an accountant, you know the following is true.
One of the most natural highs in this life is the exhilaration of balancing a complicated bank reconciliation.
I mean big cheer, dance around your office, fist-pumping exhilaration!
Am I right?
I know there are accountants out there nodding their heads right now!
Unfortunately, that beautiful zero at the bottom of your balancing formula showing that you are reconciled is sending the wrong message if you have one of the 2 problems we’re about to discuss.
Bank Rec Basics
First, let's cover the basics.
(If you have a firm grasp on the bank reconciliation, you can skip to #1, but this won’t take long!)
Your bank reconciliation makes sure all cash transactions are recorded in your books without error AND it shows how your bank balance relates back to your books.
Once everything is recorded, the difference between your bank balance and your “book balance” (the balance of your bank account in your accounting software) will be outstanding checks (OS Checks) and deposits in transit (DITs).
Outstanding checks are checks that have been written and recorded in the accounting system but haven’t hit the bank yet. The recipient hasn’t deposited them.
So your bank balance will be higher than the books by that amount.
Deposits in Transit are deposits that have been recorded in the accounting system but haven’t hit the bank yet.
Your bank balance will be lower than the books by that amount.
The Bank Reconciliation formula takes your bank balance, adds the deposits in transit, subtracts the outstanding checks, and it should equal your book balance.
Bank Balance + DITS - OS Checks = Book Balance
When the formula above is true, you are in balance!
However, it doesn’t take into account the qualitative value of the deposits in transit or outstanding checks.
And that is where people get into trouble over time.
So here are 2 key things you need to look into every time you review a bank reconciliation:
#1 Large or Old Deposits in Transit
You can be chugging along fine, balancing month after month without realizing that your deposit in transit list is getting longer and longer each month.
Ideally, the deposits on your bank reconciliation should only be from the last several days of the period and you should expect them to hit the bank in the first few days of the next period.
Like cash that hasn’t been taken to the bank yet. Or credit cards that the merchant service provider is processing and will deposit within a few days.
If a DIT is older than that, there should be a reason.
Remember, these represent deposits that have been recorded in your books.
If a lot of time has passed without them hitting the bank, it should raise a red flag.
Was revenue recorded in error?
Did a credit card transaction not get closed out properly?
Is there cash in the safe that needs to go to the bank?
Is there a more alarming reason that cash hasn’t been deposited?
These issues come up often and they get harder to research the older the deposit in transit gets.
It is crucial to look into them right away.
If DITs hang out too long, eventually you’ll have to bite the bullet and expense them as a loss, and nobody wants that!
#2 Old Outstanding Checks
Same concept here.
If there are checks on your OS checks list that are more than a few months old, they need to be researched.
It means checks get written and never hit the bank.
One of the problems with this one is that you look at your OS check amount to determine how much money in your bank is actually available to spend.
If you have $100,000 in the bank and $25,000 in OS checks, you better not spend more than $75,000 because those checks could hit the bank at any time.
However, if your OS checks list has checks from years ago on it, it is unlikely that those checks are actually going to hit the bank. Which makes it difficult to know how much funds are actually available to spend.
Old outstanding checks could also damage relationships with vendors. Are they still outstanding because they got lost in the mail or were sent to the wrong address?
If so, you think those bills were paid, but your valued vendors never actually received money for their services.
No one appreciates the beautiful 0 at the bottom of the bank reconciliation more than me, but it isn’t enough on its own.
It is crucial to assess the DITs and OS checks in detail each month.
If it hasn’t already been a part of your end of month process, don’t worry!
You may have a bit of a mess to clean up at first, but when it is a part of your regular routine, most issues that come up are easily remedied!