What is a four-column bank reconciliation, how is it prepared, and what does a worked example of one look like?

What is a four-column bank reconciliation, and what does each column hold?

The reconciliation you already know compares the bank balance and the book balance on one date and lists the items that explain the gap. The four-column version is a roll forward of each line item in that reconciliation from one period to the next, with separate columns for cash receipts and cash disbursements. Each row obeys one formula: beginning balance plus receipts in the period, minus disbursements in the period, equals ending balance.

The four columns are:

• Beginning balance. The reconciliation as it stood at the end of the prior period: bank balance, the reconciling items open on that date, and the adjusted balance.
• Receipts. Money into the account during the period, as the bank recorded it and as the books recorded it, with the adjustments that make the two agree.
• Disbursements. Money out of the account during the period, on the same basis.
• Ending balance. The ordinary reconciliation at the end of this period.

The rows are the same as in the ordinary format: balance per bank, the bank-side reconciling items, adjusted bank balance, then balance per books, the book-side reconciling items, adjusted book balance. The two outer columns are simply the ordinary reconciliation at two dates. The two middle columns are what the format adds.

What does the format prove that matching ending balances does not?

A standard bank reconciliation reconciles the book and bank balances at a specific point in time. A proof of cash reconciles both the beginning and ending balances and explains all cash receipts and disbursements over the period.

That difference matters because two errors or two transactions can cancel out before month-end. Money withdrawn early in the month and put back before the statement date will not appear in a normal bank reconciliation as a reconciling item: the ending balances agree. In a proof of cash, the withdrawal inflates bank disbursements and the repayment inflates bank receipts, and neither has a book counterpart, so both middle columns fail to agree even though the ending column does.

The same logic catches ordinary errors that net to nothing at month-end, such as a deposit and a payment recorded in the wrong amounts, or receipts or disbursements posted to the wrong account.

Where does each figure come from?

Every figure comes from records you already have. The rule that keeps the grid honest is that the bank row and the book row are each taken independently from their own record.

The bank's beginning balance on this period's statement should equal the bank balance in the prior reconciliation's ending column. If it does not, stop and resolve that first, because nothing that follows will hold.

How do you prepare one, step by step?

Build the grid in this order.

1. Set up the rows. List balance per bank, the reconciling items open at the start of the period, adjusted bank balance, balance per books, the book-side items open at the start, adjusted book balance; add rows for period-end items at step 5.
2. Fill the beginning column. Copy the prior period's completed reconciliation into it.
3. Fill the balance per bank row. Enter the statement's opening balance, its total credits, its total debits and its closing balance. Check that the row foots across: beginning plus receipts minus disbursements equals ending.
4. Fill the balance per books row the same way from the ledger, and check that it foots across.
5. Prepare the ending column as an ordinary reconciliation at period end, listing every item open on that date.
6. Complete each reconciling item row across the grid. Each item appears in the column where it arose and the column where it cleared, so that the row foots like any other.
7. Total each column for the bank section and the book section.
8. Run the cross-checks described below.

Do not fill any figure by working it backwards from other cells. If bank receipts are calculated as ending balance minus beginning balance plus disbursements, or a book figure is copied from the bank side, the cross-checks agree by construction and prove nothing, while the grid looks exactly like one that does.

What if there is no completed prior reconciliation?

If the prior period was reconciled and the reconciliation was kept, its ending column becomes your beginning column and nothing more is needed.

If no prior reconciliation exists, you cannot start with the four-column format. First prepare an ordinary reconciliation as of the day before your period begins, using the statement that closes on that date and the ledger balance on that date, and resolve every item on it. That reconciliation, once its adjusted balances agree, is your beginning column. A beginning column whose adjusted balances do not agree carries its error into every row.

Where does each reconciling item go in the grid?

In the ordinary format, each item sits once, in the single column at period end. In the four-column format, each item sits in the balance column where it is open and in the activity column where it arose or cleared. An item open at both dates — a check still outstanding from an earlier period — sits in the beginning and the ending column and in neither activity column; its row foots because the two balances are equal. Placing an item only where the ordinary format would put it is the second common mistake: the ending column agrees but a middle column does not, and you end up investigating a difference your own placement created.

Each placement below follows from applying the row formula, beginning plus receipts minus disbursements equals ending, to the item's own row. For example, a deposit in transit of 3,200.00 at May 31 that clears in June is 3,200.00 in the beginning column and nothing in the ending column, so the formula forces (3,200.00) in bank receipts: 3,200.00 − 3,200.00 − 0 = 0.

Deposits in transit are receipts recorded in the books but not yet recorded by the bank. In the ordinary reconciliation they are added to the bank balance.

• Open at the start of the period: add in the beginning column, and deduct from bank receipts. The bank records this deposit during the current period, but the books recorded it in the prior one.
• Open at the end of the period: add to bank receipts and add in the ending column. The books recorded it this period; the bank has not.

Outstanding checks are payments recorded in the books but not yet cleared by the bank. In the ordinary reconciliation they are deducted from the bank balance.

• Open at the start: deduct in the beginning column, and deduct from bank disbursements. The bank clears it this period, but the books recorded it last period.
• Open at the end: add to bank disbursements and deduct in the ending column.

Book-side items are bank-recorded amounts the books have not yet picked up. In the ordinary format, service fees, returned (NSF) checks and penalties are deducted from the book balance and interest earned is added.

• Service fees, penalties and returned checks recorded by the bank this period: add to book disbursements and deduct in the ending column.
• Interest earned this period: add to book receipts and add in the ending column.
• If you post these entries dated within the period, the ledger's closing balance becomes the adjusted balance and the items do not appear in the next grid. If you post them after period end, carry each item in the next period's beginning column and deduct it from that period's book receipts or disbursements, because the ledger now records it as next-period activity. The entries themselves belong to the treatment of each item and are not decided by the format.

Bank errors and book errors follow the same rule: place the correction in the column of the period in which the wrong amount was recorded, and in the balance column for as long as it remains uncorrected.

What cross-checks does the grid contain?

The checks are consequences of the row formula and of the two sides describing the same account, not separate rules. A completed grid has three sets of them, and it proves the period only when all of them agree at the same time.

1. Every row foots across. For each row, beginning plus receipts minus disbursements equals ending. This includes the reconciling-item rows: an item open at the start and cleared during the period nets to zero across its row.
2. Every column agrees bank to book. Adjusted bank equals adjusted book in the beginning, receipts, disbursements and ending columns. Four agreements, not one.
3. The adjusted row foots across. Adjusted beginning plus adjusted receipts minus adjusted disbursements equals adjusted ending, on both the bank and the book side.

Check 2 in the two middle columns is what the ordinary format cannot give you. Checks 1 and 3 prove that the grid itself is arithmetically sound, so that agreement in check 2 means something.

How does a failed cross-check tell you where the difference is?

A cross-check that does not agree is information about where to look. The pattern of which checks fail confines the difference.

• A row does not foot. The problem is a transcription or placement error in that row, not in the records. Fix it before looking at anything else.
• The beginning column fails and the ending column fails by the same amount, while receipts and disbursements agree. The prior reconciliation was wrong, or the ledger or statement for a closed period has changed since it was prepared. The current period is not the cause.
• The receipts column fails, and so does the ending column by the same amount. Something about money in during this period: a deposit recorded in a different amount by the bank and the books, an unrecorded credit, a deposit in transit placed in the wrong column, or a receipt posted to the wrong account.
• The disbursements column fails, and so does the ending column. The same search on money out: a check cleared for a different amount than was recorded, an unrecorded bank debit, a check the books voided that the bank paid.
• Receipts and disbursements both fail by the same amount, but the ending column agrees. Something went in and out of one record during the period with no counterpart in the other. This is the pattern an unauthorized borrowing and repayment within the period leaves, and the one a point-in-time reconciliation never shows.

Once the pattern confines the difference to a column, the search is limited to that column's transactions for the one period. Diagnosing the transaction itself is ordinary reconciliation work.

When is the four-column format worth preparing?

It costs real time. It requires detailed reconciliation of bank activity, book records, deposits, disbursements and timing differences, which can take substantial staff time. It is also only as good as the records behind it: it is less effective when statements, cash records or supporting documents are incomplete or inaccurate. And it covers cash only; it does not detect misstatements involving noncash accounts or transactions.

It is worth it when:

• someone who relies on your cash figures has asked for it;
• the ordinary reconciliation agrees but you suspect something moved through the account and back;
• one person handles both receipts and disbursements, so the separate activity columns are the main check on that person, provided someone other than that person prepares the grid, or at least takes the bank row directly from statements they obtain themselves and ties the beginning column to the prior reconciliation; a grid prepared by the person it is meant to check is no check at all;
• an ordinary reconciliation keeps showing a difference you cannot trace, and you need to know whether it sits in money in, money out or the opening position.

For a low-volume account with good segregation of duties and a clean monthly reconciliation, the ordinary format is usually enough.

What does a reviewer, lender or auditor look at first?

Auditors often request a proof of cash to verify the accuracy of cash transactions and to assess internal controls over cash handling. A requester will look first at three things. Does the beginning column match the reconciliation you gave them for the prior period? Do the bank figures match the statements they can see, independently of your ledger? And do the middle columns agree bank to book, with every reconciling item traceable to the list it came from? Attach the statements, the ledger detail for the cash account and the prior reconciliation, so the requester can test the figures without asking.

What does a completed four-column reconciliation look like?

The facts below are invented for this example.

A business reconciles its operating account for June. The May 31 reconciliation was completed and showed:

• Bank balance 24,600.00; deposit in transit 3,200.00; outstanding checks 4,150.00; adjusted bank balance 23,650.00.
• Book balance 23,650.00, with no book-side items open.

June's bank statement shows credits of 41,915.00 (including 15.00 of interest), debits of 39,245.00 (including a 45.00 service charge and a 500.00 returned customer check) and a closing balance of 27,270.00.

June's general ledger shows cash receipts of 42,300.00, cash disbursements of 39,110.00 and a closing balance of 26,840.00. The interest, service charge and returned check are not yet in the books.

At June 30, deposits of 3,600.00 are in transit and checks of 4,560.00 are outstanding. The May deposit in transit and May outstanding checks all cleared in June.

Do the cross-checks agree?

Rows foot across.

• Bank: 24,600.00 + 41,915.00 − 39,245.00 = 27,270.00.
• Books: 23,650.00 + 42,300.00 − 39,110.00 = 26,840.00.
• May deposit in transit: 3,200.00 − 3,200.00 = 0. It arose in May and cleared in June.
• May outstanding checks: (4,150.00) − (4,150.00) = 0.
• June deposit in transit 3,600.00, June outstanding checks (4,560.00), interest 15.00, service charge (45.00) and returned check (500.00) each carry their activity figure straight to the ending column.

Columns agree bank to book.

• Beginning: 24,600.00 + 3,200.00 − 4,150.00 = 23,650.00, equal to the book balance.
• Receipts: 41,915.00 − 3,200.00 + 3,600.00 = 42,315.00 on the bank side; 42,300.00 + 15.00 = 42,315.00 on the book side.
• Disbursements: 39,245.00 − 4,150.00 + 4,560.00 = 39,655.00 on the bank side; 39,110.00 + 45.00 + 500.00 = 39,655.00 on the book side.
• Ending: 27,270.00 + 3,600.00 − 4,560.00 = 26,310.00 on the bank side; 26,840.00 + 15.00 − 45.00 − 500.00 = 26,310.00 on the book side.

The adjusted row foots across. 23,650.00 + 42,315.00 − 39,655.00 = 26,310.00 on both sides.

Every check agrees, so June's receipts and disbursements are proved as well as its closing balance. The three book-side items are then recorded, and the July grid's beginning column starts from an adjusted balance of 26,310.00.

Suppose instead that the bank's June credits had been 42,915.00 and its debits 40,245.00. The closing balance would be unchanged and the ending column would still agree. But adjusted bank receipts would show 43,315.00 against 42,315.00 in the books, and adjusted bank disbursements 40,655.00 against 39,655.00: both middle columns off by 1,000.00. That is 1,000.00 that went out of and back into the account in June with no entry in the books, and it is the item to investigate.