CPA FAR Bank Reconciliation TBS: Make the Bank Side and Book Side Tie

Bank reconciliation simulations feel messy because the exhibits usually mix timing differences, bank corrections, book corrections, outstanding checks, deposits in transit, fees, NSF checks, and company errors. The calculation is not hard because each individual item is mysterious. It is hard because candidates put the right item on the wrong side.

The safest FAR workflow is to solve two questions separately:

1. What adjusts the bank statement balance?
2. What adjusts the company's book cash balance?

Only after both sides are adjusted should the balances tie.

The Two-Side Rule

Bank reconciliation items fall into two broad buckets.

Bank-side adjustments explain why the bank statement balance does not yet show valid company cash activity:

• deposits in transit
• outstanding checks
• bank errors

Book-side adjustments explain why the company's accounting records do not yet show valid bank activity or company errors:

• bank service charges
• interest earned
• NSF checks
• automatic loan payments
• electronic collections
• company recording errors

The key question is not whether the item is "cash related." Every item is cash related. The key question is whose record needs correction.

Worked Example: Why the Reconciliation Does Not Tie

Orchard Lane Supply has these records for April:

• Bank statement ending balance: 118,400
• Book cash balance before reconciliation: 113,950

Additional information:

• Deposit of 9,200 recorded by the company on April 30 was not on the bank statement.
• Checks totaling 6,750 were written and recorded by the company but had not cleared.
• Bank service charge: 120
• Interest earned on checking account: 75
• Customer check for 2,600 was returned NSF by the bank.
• Bank incorrectly charged Orchard Lane 1,500 for another customer's check.
• The company recorded check 1048 for supplies as 840; the actual check was 480.

Step 1: Adjust the Bank Statement Balance

Start with the bank statement balance:

118,400

Add deposits in transit:

+ 9,200

Subtract outstanding checks:

- 6,750

Add bank error charged against the company:

+ 1,500

Adjusted bank balance:

118,400 + 9,200 - 6,750 + 1,500 = 122,350

Step 2: Adjust the Book Cash Balance

Start with the book balance:

113,950

Subtract bank service charge:

- 120

Add interest earned:

+ 75

Subtract NSF check:

- 2,600

Correct company error:

The company recorded the check as 840, but the actual check was 480. The company reduced cash by 360 too much, so add back 360.

Adjusted book balance:

113,950 - 120 + 75 - 2,600 + 360 = 111,665

The balances do not tie. That means at least one item has been misclassified, omitted, or misstated. In this example, the adjusted bank side is 122,350, while the adjusted book side is 111,665.

Now suppose the exhibit also included an electronic customer collection of 10,685 credited by the bank but not recorded by the company. That item belongs on the book side:

111,665 + 10,685 = 122,350

Now the reconciliation ties.

How to Read a FAR Bank Reconciliation Simulation

Step 1: Label each exhibit before calculating

Mark every item as one of four types:

• bank-side timing item
• bank-side error
• book-side bank activity
• book-side company error

Do this before you start typing numbers into answer fields.

Step 2: Build the adjusted bank balance

Use only items that affect the bank statement balance:

• Add deposits in transit.
• Subtract outstanding checks.
• Correct bank errors in the direction needed to fix the bank statement.

Step 3: Build the adjusted book balance

Use only items that affect the company's cash ledger:

• Add bank credits not recorded by the company.
• Subtract bank debits not recorded by the company.
• Correct company recording errors.

Step 4: Create adjusting entries only for book-side items

Bank-side timing items usually do not require journal entries. The company already recorded those items. The bank simply has not processed them yet.

Book-side items usually do require entries because the accounting records need to be updated.

Common FAR Traps

Trap 1: Recording deposits in transit as journal entries

The company already recorded the receipt. The bank has not processed it yet. That is a bank-side adjustment, not a new book entry.

Trap 2: Treating outstanding checks as book deductions

Outstanding checks were already recorded by the company when issued. They reduce the bank side because the bank has not cleared them yet.

Trap 3: Ignoring bank credits and debits

Interest income, service charges, NSF checks, and automatic payments often appear only on the bank statement. The books need entries for those items.

Trap 4: Correcting errors in the wrong direction

If the company recorded a check too high, book cash is too low and should be increased. If the company recorded a deposit too high, book cash is too high and should be decreased.

Exam Framing

For FAR, the final adjusted bank balance and adjusted book balance should agree. If they do not, resist the urge to force the number. Instead, recategorize the items.

Ask:

• Did I put a timing difference on the correct side?
• Did I adjust for bank errors on the bank side?
• Did I record bank fees, NSF checks, interest, and automatic transactions on the book side?
• Did I correct company errors in the right direction?

That checklist is faster than starting over from scratch.