How are checks handled or processed during a bank reconciliation?

What statuses can a check hold at the reconciliation date?

Any check in the period sits in one of eight statuses. The status decides which balance it adjusts and whether it follows you into the next period.

The outstanding check is the familiar one: a check payment that has been recorded by the business but has not yet cleared its bank account as a deduction from cash. Until it clears, it stays listed as an outstanding item in each reconciliation. The other statuses are where books go wrong. A business can record a check for a greater or lesser amount than was written, and the bank can report a check at an incorrect amount or in the wrong customer's account. A voided check leaves no mark at the bank; marking it void in the accounting system usually reopens the payable and increases the cash balance. A check the institution refuses to pay because it was written for more than the account held is a nonsufficient funds (NSF) check. None of the sources here sets out the reconciliation treatment of your own returned check; the row follows the outstanding-check logic — the check has still not cleared your account as a deduction from cash, so it stays a bank-side item until it is reissued or voided, and any fee the bank charges for it is a separate book-side item owned by the bank-charges guide. Take what the statement shows (a debit and an offsetting credit, or nothing) from the bank's returned-item notice. The returned-check guide owns the full treatment.

How do you establish each check's status?

Status is not visible on either record alone. It comes out of a comparison, and the comparison is only as good as the two lists going into it.

Assemble the issued record from every source first. Checks can come from the accounting system, a paper checkbook, or a payment service that prints and mails checks on the business's instruction. Pull every one of those into a single list before classifying anything, organized by check number. A check register states the payment dates, check numbers, payment amounts and payee names for all check payments. The completeness of the assembled list is evidenced by the number sequence, covered below: every number from the first to the last check used in the period should be either on the list or accounted for as void or unused.

Then read the statement's paid items. A U.S. bank that sends a statement showing paid items must either return or make available the items paid, or describe them in the statement well enough for you to identify each one. Banks are not required by law to return canceled checks, so whether you get the original, an image or a substitute check depends on your account agreement and the bank's policies. Ask for the image whenever an item is in dispute.

Match on three fields. A check is paid when its number and amount agree between the two records and the paid date falls on or after the issue date. Anything that fails one of those tests is not a match, however close it looks. Paid also requires a posted ledger entry. A check that is in the assembled issued record only through a checkbook stub or a payment-service file, with no entry in the books, is treated as a no-book-record check written by the business and is posted before it can be matched.

Before you call a check outstanding, confirm it was actually released. A check that was recorded but never mailed, or entered twice, is not outstanding. Carrying it as outstanding keeps the cash balance wrong every month it sits there.

What do you do when the issued record and the statement disagree?

When the two records disagree on number, amount or date, decide which record is wrong before you change anything. There are three possibilities, and each leads to a different action.

1. The book record is wrong. The check image, the vendor's bill or the check stub shows the book entry was keyed incorrectly. Correct the books. This is a book-side correction and does not carry forward.
2. The institution processed the item incorrectly. The image shows the check was written for the amount you recorded, but the bank paid a different one, or charged a check to your account that belongs to someone else. Raise it with the bank in writing, carry the difference as a bank-side reconciling item, and track it until the bank corrects it.
3. Neither is wrong. A date disagreement where the statement date is simply later than the issue date is timing. The check is paid, or outstanding if it has not yet cleared.

A number mismatch deserves extra care. If the amount and payee match a check in your register but the number differs, a keying error in the register is the likely cause, and the image settles it. If nothing in the register matches, treat the item as having no book record.

How do you handle a check paid for a different amount than you recorded?

Never overwrite the book amount to match the statement without evidence. The statement is a record of what the bank did, not proof of what the business authorized. Overwriting turns a bank error into a silent book adjustment and removes any basis for getting the money back.

Settle it with the image. If the image shows the amount the bank paid, the book entry was wrong. If the image shows the amount you recorded, the bank erred. The written amount on the check, supported by the bill it paid, is the evidence.

Suppose check 1043 was entered at 482.00, the statement shows 428.00, and the image and the supplier's invoice both show 428.00. The book overstated the payment by 54.00 (482.00 − 428.00). Items the bank knows about but the business does not must be journalized in the business's records, and a book error is corrected the same way:

Credit whichever account the original check debited — the expense account if the check was coded directly to expense, accounts payable if it paid a bill already on the books.

If instead the image showed 482.00, no journal entry is made. The 54.00 goes on the bank side as a reconciling item, and the claim with the bank stays open until the correction appears on a statement.

What if the statement shows a paid check with no book record?

This is the status most often missed, and the one that can hide a loss. Before recording anything, establish whether the business wrote the check.

The business wrote it outside the accounting system. A check torn from the paper checkbook and never entered is the usual cause. Confirm with the person who wrote it, match the image to a bill or receipt, and record it. For a 300.00 repair paid by handwritten check 1046:

The business did not write it. The payee is unknown, the signature is not an authorized signer's, the number belongs to stock that is still unused in the drawer, or the check was charged to the wrong account. Do not record it as an expense. Recording it would treat a possible loss as an ordinary purchase and bury the evidence. Keep it as a bank-side reconciling item, labelled unresolved, and report it to the bank at once. Where the check was signed in the business's name without authority or was altered, reporting it is also a duty under UCC § 4-406 as enacted in your state: a customer who receives a statement must examine it with reasonable promptness for payments not authorized because of an altered item or an unauthorized signature, and must promptly notify the bank of the relevant facts. If the bank proves the customer failed that duty, the customer can be precluded from asserting the unauthorized signature or alteration against the bank, and for later items by the same wrongdoer the time allowed to examine and notify is a reasonable period not exceeding 30 days — which is why the report goes out with the reconciliation, not after it. Keep the image and your notes with the reconciliation.

How do check numbers show whether the list is complete?

A reconciliation that only examines checks the books already know about cannot find a check the books never recorded. The number sequence closes that gap. Accounting for transactions in numerical sequence is a recognized control over the completeness of recorded data.

Every period, list the range of check numbers used in each issuing source's number series and account for each number in each series:

• A gap in the sequence. A missing number is either an unrecorded check, a spoiled check that was never marked void, or a missing blank. Find the physical check, the stub or the image. Record the number of a missing blank that cannot be found and watch for it on later statements; if it is ever paid, treat it as a paid check the business did not write.
• A number on the statement that the books never issued. Check it against the unused stock. If that blank is still in the drawer, the paid item cannot be the business's own check, and it is escalated.
• Unused stock. Blank checks are a vulnerable asset. Physical controls include security for and limited access to such assets, so keep blank stock locked and record the first and last unused numbers at each reconciliation.
• Voided checks. Keep the physical voided check, or its stub, so the number is accounted for.

When the same person writes, signs and records checks. The person who writes a check should not also sign it. In a small business that separation often is not possible. Where segregation of duties is not practical because of limited personnel, alternative controls are designed to cover the risk. Here, that means someone other than the check writer, usually the owner, reviews the number sequence, the unused stock and the statement images each period and signs off on that review. In that case, the sequence check is not a formality; it is the main protection left. How to divide check duties across a small team more generally is its own guide; this pass only needs the sequence and stock review done and signed by someone other than the writer.

What does a classification pass look like?

Here is one September pass for an account where checks come from the accounting system and a paper checkbook. Numbers 1040 to 1046 were used; 1047 onward is unused stock.

Every number from 1040 to 1046 is accounted for, the old check 1031 is carried from earlier periods, and the one unexpected number was tested against physical stock rather than assumed.

Where does each status get its full treatment?

This pass only classifies. Outstanding checks and their worked example, voided checks, returned and NSF checks, and stale checks each have their own guide. So do the reconciliation procedure as a whole, bank fees such as check-printing charges, positive pay files, a reconciliation that still will not tie after every check is classified, and the choice between editing, voiding, deleting and reversing a wrong entry. If several months have gone unreconciled, bring those periods current in order before relying on a single-period pass.

When is the check portion of the reconciliation finished?

It is finished when the population is exhausted, not when the totals happen to agree. That means:

• Every check in the issued record and every check on the statement holds exactly one status.
• Every number in the period's range is accounted for, including voids and unused stock.
• Book corrections are posted, and bank-side items are listed individually.
• The outstanding, returned, aged and unresolved items are carried to the next period as a named list.
• No check is left unclassified to be absorbed into a plug or an unexplained difference.

A forced difference hides exactly the items this work exists to find. If a difference remains after every check has a status, the cause lies elsewhere in the reconciliation.