Making financial decisions with accurate information is imperative and understanding your cash balance is fundamental to the decision making process. Cash is usually the first item on the balance sheet of the financial statements and can be an indicator of the short term viability of a corporation. However, the accounting cash balance does not always reflect what is on a bank statement. The difference is determined by a reconciliation of the bank and done for each bank account.
Two of the most common adjustments made to the bank include outstanding checks and deposits in transit.
Outstanding checks include payments that have been made, most often by a check written as of the financial statement date, however had yet to clear the bank. These amounts must be subtracted from the bank balance in the reconciliation.
Deposits in Transit
The deposits in transit are funds that have been collected as of the financial statement date, however have not been deposited or reflected in the bank balance. These amounts should be added to the bank balance in the reconciliation.
Reconciling Current and Month End Balance
Understanding your current cash position should be done in conjunction with an understanding of near term cash obligations. For instance, a mid month bank reconciliation can be included in one column, followed by estimates of cash disbursements to the end of the month. This type of bank reconciliation will allow a clear understanding of the remaining cash requirements to month end.
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