Lesson 43 - Beginner accounting course

43. Recording Bank Errors and Adjustments

Bank errors and necessary adjustments can cause discrepancies between a company’s cash book and its bank statement. Recording these correctly is essential for accurate financial reporting and proper reconciliation.

1. Identifying Bank Errors and Adjustments

When reconciling the company’s cash records with the bank statement, discrepancies may arise due to:

1. Bank Errors – Mistakes made by the bank in processing transactions, such as:

   • Incorrectly debiting or crediting the account

   • Double charging fees

   • Depositing an incorrect amount

   • Processing unauthorized transactions

2. Unrecorded Transactions – Legitimate charges or deposits that appear on the bank statement but have not yet been recorded in the company’s cash book. These may include:

   • Bank charges (e.g., service fees, overdraft fees)

   • Interest earned on the bank account

   • NSF (Non-Sufficient Funds) checks returned by the bank

   • Unrecorded deposits or payments

2. Correcting Bank Errors in Accounting Records

If the bank makes an error, the company should:

1. Notify the bank immediately and request correction.

2. Adjust the bank reconciliation statement by adding or subtracting the incorrect amount to reach the correct balance.

3. Record a journal entry to reflect the correction in the company’s cash book.

Example 1: Bank Overcharges a Fee

The bank incorrectly charges a $50 fee instead of $25. The correction requires an adjustment:

3. Recording Adjustments for Unrecorded Transactions

Companies often discover unrecorded transactions when reviewing their bank statements. These should be properly recorded in the cash book using journal entries.

Example 2: Recording Bank Charges

If the bank deducts a $20 service fee that was not recorded in the books:

Example 3: Recording Interest Earned on Bank Balance

If the company earns $30 in interest on its bank account:

Example 4: NSF (Non-Sufficient Funds) Check Bounced

A customer’s check for $500 was deposited but later bounced due to insufficient funds. The adjustment reverses the deposit:

4. Adjusting the Bank Reconciliation Statement

After recording necessary adjustments in the general ledger, update the bank reconciliation statement.

Example of a Bank Reconciliation Statement After Adjustments

The adjusted bank balance should now match the adjusted cash book balance. 

Key Takeaways

• Bank errors should be reported to the bank and corrected in the company’s records.

• Adjustments are necessary for unrecorded transactions such as bank fees, interest, and bounced checks.

• A properly updated bank reconciliation ensures accurate financial statements and prevents discrepancies.

Regular reconciliation and error recording help businesses maintain precise cash management and financial accuracy.