Adjusting Entries in Bank Reconciliation

While handling finances, matching the internal records with the bank’s records is necessary, and businesses are required to take important steps. Bank reconciliation plays a huge part for the sake of maintaining financial exactness and accountability. Adjusting entries plays a noteworthy role mostly for businesses functioning in India because of the specific financial regulations and accounting standards.

What are Adjusting Entries?

In the time of bank reconciliation, several discrepancies are found, and to correct these discrepancies, some journal entries are made in the company’s general ledger, known as adjusting entries. These entries usually involve items such as bank fees, interest income, issued checks not recorded, direct deposits, and returned payments.

Adjusting entries is crucial because timing differences or errors often cause bank records to not sync with the company’s book.

Why are Adjusting Entries Important for Indian Businesses?

In a country like India, regulatory bodies like the Reserve Bank of India (RBI) and the Institute of Chartered Accountants of India (ICAI) impose strict compliance criteria that lead to maintaining correctness in financial records becoming important for companies. Adjusting entries throughout the process of bank reconciliation ensures that the company’s books are credible and follow accounting standards like the Indian Accounting Standards (Ind AS).

Also, businesses deal with various types of bank transactions, i.e., electronic fund transfers, NEFT/RTGS payments, checks, and e-banking charges. Many discrepancies can be faced if you are dealing with these types of transactions. With the help of adjusting entries, companies avoid mistakes before making into a bigger headache of financial discrepancies that leads to penalty charges, falsification of fiscal health, or even regulatory challenges.

Common Scenarios Requiring Adjusting Entries in Bank Reconciliation

Following are some of the common scenarios that require adjusting entries in bank reconciliation:

Bank Fees and Charges

Banks don’t provide their services for free. They’ll charge fees for things like wire transfers, cheque processing, and account maintenance. Problem is, these charges might not show up immediately in the company’s books. During bank reconciliation, companies need to spot these fees and make adjusting entries to account for them, so everything lines up.

Interest Income

Sometimes, banks add a little extra to the account in the form of interest income. This isn’t always caught by the accounting team right away, though. To make sure the company’s books actually reflect this additional income, an adjusting entry is needed. Skipping this would mean the books don’t show the real cash position.

Unpresented Cheques (Outstanding Cheques)

Companies issue cheques, but vendors or employees don’t always cash them immediately. When this happens, the bank statement balance and the company’s book balance won’t match. This difference will eventually correct itself when the cheque is cashed, but until then, an adjusting entry is made to account for this timing gap.

Direct Deposits or Automated Payments

Sometimes the bank makes payments on behalf of the company—think loan EMIs, utility bills, or salary payments. If the accounting team doesn’t know about these transactions right away, they won’t show up in the books. Adjusting entries are necessary to record these payments properly, ensuring everything is in sync.

NSF (Non-Sufficient Funds) or Returned Cheques

A cheque might bounce because there aren’t enough funds to cover it, leaving it marked as NSF (Non-Sufficient Funds) in the bank statement. The bounced cheque will show up on the bank side but might not be in the company’s records yet. An adjusting entry is needed to reflect this, so the books show the actual cash balance.

Steps for Making Adjusting Entries in Bank Reconciliation

The procedure of generating adjusting entries in bank reconciliation requires some steps to get the accuracy in financial reporting.

Identify Discrepancies

The task involves recognizing bank statements and comparing them with the internal cash book. Determine all the discrepancies that need adjustment, such as bank fees, unrecorded checks, and interest income.

Record Adjusting Entries in the General Ledger

When you find the items that need adjustments, generate entries in the general ledger. Each entry needs to have a clear description, such as “Bank Service Charges “or “Interest Earned,” to assure clarity.

Update the Reconciliation Statement

Before updating the bank reconciliation statement, record the adjusting entries. Be sure that the updated balance of the company’s records aligns with the bank’s ending balance.

Review and Confirm

Once the adjustments are made, review the reconciliation statement to confirm that all discrepancies are resolved. This final review is crucial to ensure the accuracy of the reconciliation process.

Questions to Understand your ability

Que.1 What do adjusting entries mean from the perspective of bank reconciliation?

a) Entries are included in the ledger for capturing profits.

b) Changes made in the company’s ledger to resolve discrepancies.

c) Notes added to the ledger to explain transaction details.

d) Entries used to record petty cash expenses.

Que.2 Why are adjusting entries particularly important for Indian companies?

a) To align with the regulations set by RBI and ICAI

b) To maintain large profit margins.

c) To facilitate tax evasion.

d) To make their financial reports seem better.

Que. 3 Which of these situations typically DOES NOT need an adjusting entry during bank reconciliation?

a) A bank fee for account maintenance not recorded in the company’s books.

b) Interest credited by the bank but missed in the company’s records.

c) An employee payroll entry already properly recorded in both bank and company books.

d) A cheque deposited that bounced due to non-sufficient funds.

Que.4 Once adjusting entries are made, why is it necessary to update the reconciliation statement?

a) To make sure the adjusted balance in the books matches the bank statement.

b) To finalize quarterly profits and losses.

c) To automatically record all future bank transactions.

d) To prepare the books for a financial audit.

Que.5 Which example below shows a “timing difference” that might call for an adjusting entry?

a) A cheque granted by the company but not yet encashed by the payee.

b) An online transfer that reflects in both bank and company records instantly.

c) A direct deposit that the company has already recorded.

d) A cash payment received and entered in the books on the same day.

Conclusion

Adjusting notes in bank reconciliation is essential for preparing correct entries in the ledger, accounts receivable, accounts payable, and more, especially in India, where following rules is of paramount importance. Changing notes can also help Indian businesses ensure that the records they keep are in harmony with their banks. This helps them to keep their financial books clean with no problems. Not only do an actual bank reconciliation and quick changes facilitate audits, but they also paint a clear picture of how a company’s financial position is.