What is the Difference Between Bank Balance and Book Balance?

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 https://kelleysbookkeeping.com/current-ratio-calculator-working-capital-ratio/ 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.

• The $1,565 credit memorandum requires a compound journal entry involving four accounts.
• Cash is debited for $1,565, bank fees expense is debited for $25, notes receivable is credited for $1,500, and interest revenue is credited for $90.
• 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.
• Such discrepancies are regularly noted due to time lags in processing transactions and lack of knowledge of certain charges debited to the company account by the bank.
• 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.

On the bank reconciliation, add unrecorded automatic deposits to the company’s book balance, and subtract unrecorded automatic withdrawals. Because reconciling items that affect the book balance on a bank reconciliation have not been recorded in the company’s books, they must be journalized and posted to the general ledger accounts. The $1,565 credit memorandum requires a compound journal entry involving four accounts.

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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. The Vector Management Group made a $3,000 deposit on the afternoon of April 30 that does not appear on the statement, so this deposit in transit is added to the bank statement balance. Since the book balance is the gross balance of funds in the account before any checks are cleared or deposits posted, the figure may or may not accurately reflect how much money the account holder has to work with. In order to arrive at that figure, it is necessary to deduct any outstanding checks or other debits from that balance.

• Typically, book balance is used to manage the cash within a company’s checking account.
• First, there are likely to be checks outstanding that were recorded in the company’s book balance, but which have not yet been presented to the bank, and so are not recorded in the bank balance.
• If the bank incorrectly recorded a transaction, the bank must be contacted, and the bank balance must be adjusted on the bank reconciliation.
• Outstanding checks refer to the checks issued by the company but were not presented or cleared prior to the issuance of the bank statement.
• 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.

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What is likely to happen when bank deposits made by an account holder exceed withdrawals?

However, there are several scenarios when the book balance can differ from a company’s bank balance. 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 What Is Bank Balance And Book Balance? 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. Companies perform bank reconciliation to match the cash balance in company’s cash account and the cash balance according to its bank statement.

(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. Checks that have been written and sent out but have yet to clear through the banking system.