Journal Entries for Bank Reconciliation: Videos & Practice Problems

After completing a bank reconciliation, journal entries must be made for items in the book column. For bank collections and electronic funds transfers (EFT), debit cash and credit accounts receivable. For EFT payments, debit accounts payable and credit cash. Service charges require debiting an expense account and crediting cash. Interest revenue involves debiting cash and crediting interest revenue. Nonsufficient funds (NSF) checks necessitate debiting accounts receivable and crediting cash. Lastly, correct book errors by adjusting the original entry to the correct one.

Bank Reconciliation Journal Entries

Alright. So, after you've completed your bank reconciliation, you need to make journal entries for all of the items in the book column. Let's see how that works. So, just like I said, we have to make journal entries for every item in the book column. Okay. So, the book column, right, we had some amount of cash and then we found all these things that had affected the cash account that we had not taken journal entries for yet.

Let's see, the bank collection. If the bank collects money on our behalf, that's usually some situation where a customer owes us money and they're finally paying us. So, the journal entry is going to look something like this. Debit cash because we received cash, I'll just put x's for the amount and we're gonna credit accounts receivable, AR, right? Because it’s a customer that's paying us, so we decrease the balance in accounts receivable and we receive the cash.

Okay. So, this all happens with the bank reconciliation. After you've made the bank reconciliation, you make these journal entries depending on which items showed up during your reconciliation.

Electronic funds transfer. Okay. So, if you received an electronic funds transfer, that's usually something that generally a customer paid you or something. So, it would be the same as bank collections and we would see something like this. Cash and AR just like above, right? We received cash and we reduce our accounts receivable from a customer. But if it's an EFT payment, the situation where we paid somebody, well that would be cash leaving our account, right? So we would be paying off something like accounts payable, we would debit accounts payable a liability, right? So, that would reduce our liability by debiting it and we would credit cash to reduce our cash.

Next is a service charge. So, this is where the bank charges us a fee. So, what happens when the bank charges a fee? We take an expense, right, we had some sort of expense and it would be something like, you know, bank fee expense, right? Whatever it might be. Could be bank fee expense, you know, service charges, whatever you want to call the expense account. You would debit that, right, to increase the expense and we would credit cash because it came out of our cash, right? The bank took it out of our bank account, so we have to reduce cash.

Interest revenue. In this case, we're receiving cash, right? The bank is paying us cash for our balance. So we debit cash because we receive cash and we're gonna credit what do we credit in this case? We're gonna credit interest revenue, right? We earned interest, we earned it during this period, we earned revenue. So we're gonna credit interest revenue, revenues go up with a credit, so that's good. We received cash from interest revenue.

How about not sufficient funds checks? So, NSF checks, this one's a little tricky. You have to think about what we did in the past. In the past, so I'm actually going to draw it here. So I'll do it in parenthesis. In the past, we might have made a journal entry that looked like this. Oh, we received a check from a customer. Great. Let's make a journal entry because we received this check. We would say, okay we received cash from this customer and he no longer owes us this money. Right? So, we would have made this entry sometime in the past when we received the check and now we're looking at the bank statement and they said, hey, that check bounced. That's not fair. We didn't get that money from the customer and we were supposed to. Well, that customer still owes us that money in this case. So what we have to do is reverse this entry. We're going to debit accounts receivable, so now what we do is we debit accounts receivable for whatever that amount was and we credit cash, right? Because what happened is before we thought we had received this cash. So before we thought we had received this cash, so we had increased our cash balance but now we're realizing here we are.

Alright, so the last thing here is book errors. Okay? Here we are. Alright. So the last thing here is book errors. Okay. Book errors are going to be really tough for me to tell you, so you just have to remove the effects there. Okay, you have to remove the effects of the error and it generally has to do with something like thinking how we did with the NSF checks. We have to think about the entry we would have originally made and then the correct entry and then we have to make it correct, right? We have to take it from the incorrect error entry to the correct entry and find out what would get us there. Okay? So that is how we make the journal entries.

Let's go ahead and pause and we'll make the journal entries from our practicing, BankRight. Alright, let's do it now.

Create the journal entries from the information in the bank reconciliation:

Alright. So, let's create the journal entries from our bank reconciliation. If you notice, this is the bank reconciliation that we had made previously when we first learned bank reconciliations. So now what we're going to do is we're going to take this reconciliation and make the journal entries. The first thing you want to know is that this column doesn't matter. We do not care about the bank side. Remember, we want to take our book balance, so right now our cash on our books says that we have $34,100 that's our balance in cash right now, but it should be $45.90. So what we're going to do is adjust for all of these things. Each of these will have a journal entry, each one has its own separate journal entry. Okay? So every time that you do a bank reconciliation, you look on the book side and you look at the items that changed in between and each one gets a journal entry. So let's go ahead and do each of them. I'm going to label them here 1, 2, 3, and 4 and let's make each of the journal entries. So the first one, EFT receipt of dividend revenue. In this situation, the bank received revenue on our behalf, right? We received an EFT receipt, right? There was money that was received, so we're going to debit cash to increase our cash by $900, but what's the credit in this situation? Notice when I talked about EFT receipts above, we assumed it was from a customer, but here it tells us that it was dividend revenue, right? So if it's dividend revenue, well we've got to credit our dividend revenue, right? We earned dividend revenue, so this is a revenue account. And we credit it, it goes up with credit so we're good there. That is our first entry. Notice that brought our cash balance up by $900. Let's make our second entry. The book error, check number 333. In this case, I believe it was a situation where we had paid a check so there's not enough information really right there, but if we go back to the previous example you'll notice that this was a situation where we had paid a cheque to our supplier, but we had recorded it incorrectly. We had paid the correct amount of $150 but we had recorded that we had paid $5.10. So, this $3.60 difference, we need to increase our cash back up from that. Okay? So our cash goes up by $3.60 and in that case, it was a payment to a supplier. So what we're doing is partially reversing the entry. Okay? So we're going to credit accounts payable to signify that we had overly reduced it before. So, that would be our second entry there where we're increasing the cash. Notice it's very easy to tell which side of the entry cash is going to be because of the direction of cash in the reconciliation. If it was an addition to cash, well, we know we're going to debit cash in that journal entry. If it was a subtraction to cash like in our next two, we know we're going to be crediting cash to reduce cash. So let's go ahead and do the next 2 entries. What did we have for number 3? We had a service charge. The bank charged us a fee so we're going to have something like a bank fee expense, whatever it might be, could be named any number of things for $20 so that goes up with a debit $20 and we're decreasing our cash, right. We paid cash $20, so we get rid of that and last but not least is the not sufficient funds check. So, remember, this one's a little tricky. This is a situation where a customer had paid us, mailed us a check, we're like great, we received this check, we recorded it in our books, but now we have to reverse that, we didn't actually get that money. The bank statement is now showing that that check bounced. So what we're going to do is debit our accounts receivable because we're still owed that money, right? The customer, we thought they had paid us so we had decreased accounts receivables but in essence, they still owe us that money because the cheque bounced. So our accounts receivable goes up by $50 and our cash goes down by $50, right? Because we had previously increased our cash by $50 when we thought we had gotten that money, alright? Last thing I want to show you, we've now made all the journal entries, the last thing I want to show you is that we did get to our adjusted balance. So I'm going to do a T account over here. Yep. And we've got our cash account. So notice we started with $3,400, right? And our unadjusted book balance was $3,400. So we had a debit balance of $3,400 in the account and then what happened? Then we made these 4 journal entries. So, journal entry 1, I'll do it in green. We added $900. Journal entry 2, we added $360. Journal entry 3, we lost $20 there and journal entry 4, we lost $50. So when we look at all the effects of these transactions, well then we should end up with the correct ending balance. $34,100 another debit of $900 another debit of $360. So we add all those and then subtract the credits minus $20, minus $50, and there we have it. We've got an ending balance in cash of $45.90 after those journal entries, so our cash balance matches all of these adjustments, right? We've now adjusted our cash balance based on this bank reconciliation. So that's about it here. That's the journal entries for bank reconciliations. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What are the journal entries for bank collections in bank reconciliation?

For bank collections, the journal entry involves debiting cash and crediting accounts receivable. This is because the bank collects money on your behalf, typically from a customer who owes you. The entry would look like this:

$Debit \mathrm{Cash}$

$Credit \mathrm{Accounts} \mathrm{Receivable}$

This increases your cash balance and decreases the accounts receivable balance, reflecting the payment received from the customer.

How do you record electronic funds transfers (EFT) in journal entries for bank reconciliation?

For electronic funds transfers (EFT), if you receive an EFT, the journal entry is similar to bank collections: debit cash and credit accounts receivable. If you make an EFT payment, the entry would be:

$Debit \mathrm{Accounts} \mathrm{Payable}$

$Credit \mathrm{Cash}$

This reduces your accounts payable (a liability) and decreases your cash balance, reflecting the payment made.

What is the journal entry for service charges in bank reconciliation?

For service charges, the journal entry involves debiting an expense account and crediting cash. This reflects the fee charged by the bank. The entry would look like this:

$Debit \mathrm{Bank} \mathrm{Fee} \mathrm{Expense}$

$Credit \mathrm{Cash}$

This increases your expenses and decreases your cash balance, reflecting the service charge deducted by the bank.

How do you handle nonsufficient funds (NSF) checks in journal entries for bank reconciliation?

For nonsufficient funds (NSF) checks, you need to reverse the original entry made when you thought you received the cash. The journal entry would be:

$Debit \mathrm{Accounts} \mathrm{Receivable}$

$Credit \mathrm{Cash}$

This increases your accounts receivable (since the customer still owes you) and decreases your cash balance, reflecting the bounced check.

What are the journal entries for correcting book errors in bank reconciliation?

To correct book errors, you need to adjust the original incorrect entry to the correct one. This involves determining the incorrect entry made and the correct entry needed. For example, if you mistakenly debited cash instead of accounts receivable, you would reverse the incorrect entry and then make the correct one:

$Debit \mathrm{Accounts} \mathrm{Receivable}$

$Credit \mathrm{Cash}$

This ensures your books accurately reflect the correct transactions.