Reasons why the bank balance differs from the book balance
/What is a Bank Balance?
A bank balance is the ending cash balance appearing on the bank statement for a bank account. The bank balance can also be derived at any time when an inquiry is made regarding the bank's record of the cash balance in an account.
What is a Book Balance?
A book balance is the account balance in a company's accounting records. The term is most commonly applied to the balance in a firm's checking account at the end of an accounting period.
The Difference Between the Bank Balance and Book Balance
The bank balance reported by your bank is usually different from the book balance in your accounting records. There are several reasons for this difference, which are as follows:
Outstanding checks. The company has issued checks that have not yet been presented to the bank for payment. Since they have not been presented, the bank does not record these checks in its records. This difference will eventually vanish, when the bank receives the checks.
Deposits in transit. The company records received cash and then sends the cash to the bank. If the cash is still in transit as of month-end, then the bank will not record it until the following month. As was the case with outstanding checks, this difference will vanish when the bank receives the deposits.
Interest on deposited cash. Depending on the nature of the account, the bank may credit interest income to the account. The company is not aware of this amount until the bank statement arrives, and so has not yet recorded it.
Bank service fees. The bank charges the account for a variety of services, and removes the related cash from the company’s account. The company is not aware of these charges until the bank statement arrives, and so has not yet recorded them.
Check printing charges. The bank charges the company to print additional checks for it, and removes the related cash from the company’s account. The company is not aware of the amount of this charge until the bank statement arrives, and so has not yet recorded it.
Bank error. The bank has incorrectly recorded a transaction. In this case, the bank must be notified to correct the error.
Company error. The company has incorrectly recorded a cash-related transaction. In this case, the company accountant corrects the error.
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Documentation of Bank Balance and Book Balance Differences
When any of these differences have already been recorded in the company’s records but not those of the bank, they are itemized as reconciling items on the bank reconciliation. Examples are outstanding checks and deposits in transit. Outstanding checks are listed as a deduction from the bank balance, while deposits in transit are added to the bank balance.
When any of these differences are listed on the bank statement, they should be recorded on the books of the company, using journal entries. Examples of items to be entered in this way are the interest on deposited cash, bank service fees, check printing charges, and company recordation errors.
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