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I remember my first bank reconciliation as a junior accountant. I matched every single check and deposit, but my book balance still didn't match the bank statement. The culprit? A $12 bank service charge I never recorded. That tiny fee taught me the power of adjusting entries. These entries are the final step in the reconciliation process—they update your general ledger to reflect items that only appear on the bank statement (or errors you uncover). Over the years, I've seen hundreds of adjustments, and in this guide, I'll walk you through the most common ones with real examples, so you never miss a beat.

Common Types of Adjusting Entries (with Examples)

Adjusting entries fall into a few buckets. Let's look at each with a sample company, ABC Corp, which has a book balance of $10,000 and a bank statement balance of $10,500 before adjustments. The difference? Several items that need journal entries.

1. Bank Service Charges

Banks deduct monthly fees, check printing charges, or ATM fees. These appear on the bank statement but not in your books until you record them. For example, ABC Corp's bank charged a $15 service fee. The entry:

Debit: Bank Service Charge Expense $15
Credit: Cash $15

2. Interest Earned

If your account earns interest, the bank adds it. You need to record that income. ABC Corp earned $8 interest. Entry:

Debit: Cash $8
Credit: Interest Revenue $8

3. NSF Checks (Non-Sufficient Funds)

A customer's check bounced. The bank deducted the amount from your account, and you need to reverse the original receivable or cash. Suppose a $500 check from Customer X bounced. Entry:

Debit: Accounts Receivable – Customer X $500
Credit: Cash $500

4. Errors in the Company's Books

Maybe you recorded a check for $230 but the actual amount was $320. The difference is $90 understated. Entry:

Debit: Expense (original account) $90
Credit: Cash $90

5. Bank Errors (Less Common)

If the bank made a mistake (e.g., deposited $1,000 instead of $100), you'd notify the bank—no entry in your books until corrected. But if you discover an error that affects your books, adjust accordingly.

Step-by-Step Guide to Recording Adjusting Entries

Here's my go-to process, refined after hundreds of reconciliations:

  1. Compare bank statement to book balance – List differences.
  2. Identify items requiring adjustment – These are items on the bank side not yet in books (fees, interest, NSF).
  3. Create journal entries – For each item, debit or credit Cash and the corresponding account.
  4. Post to ledger – Update your general ledger.
  5. Recalculate book balance – After entries, book balance should equal bank balance (adjusted for timing differences like deposits in transit).

One pitfall I often see: people try to adjust the bank statement instead of their books. Never do that. Adjusting entries always go into the company's general ledger.

ItemBook EffectBank EffectAdjusting Entry Needed?
Deposit in TransitRecordedNot yetNo (only on bank side)
Outstanding CheckRecordedNot yetNo (only on bank side)
Bank Service ChargeMissingRecordedYes
Interest IncomeMissingRecordedYes
NSF CheckOriginally recordedDeductedYes
Book ErrorWrong amountCorrectYes

Real-World Example: A Complete Bank Reconciliation for ABC Corp

Let's pull it all together. As of May 31, ABC Corp's book balance is $10,000. The bank statement shows $10,500. Differences:

  • Bank service charge: $15 (bank deducted, not in books)
  • Interest earned: $8 (bank added, not in books)
  • NSF check from Customer Y: $200 (bank deducted, still in books as cash)
  • Check #1045 recorded as $150, but actual amount was $180 (error of $30 understated expense)

Step 1: Adjusting Entries

Entry 1 (Service charge):
Debit Bank Service Charge Expense $15, Credit Cash $15.

Entry 2 (Interest):
Debit Cash $8, Credit Interest Revenue $8.

Entry 3 (NSF):
Debit Accounts Receivable – Customer Y $200, Credit Cash $200.

Entry 4 (Error):
Debit Office Expense $30, Credit Cash $30.

Step 2: Post to books

Initial book balance: $10,000
Subtract service charge: –$15 → $9,985
Add interest: +$8 → $9,993
Subtract NSF: –$200 → $9,793
Subtract error adjustment: –$30 → $9,763

Now adjusted book balance = $9,763. Compare to bank statement: $10,500. We still have timing differences: a deposit in transit of $400 and outstanding checks totaling $1,137. So bank adjusted balance = $10,500 + $400 – $1,137 = $9,763. Matches!

Pro tip: I always double-check the math by adding the bank adjustments in a separate column. It's easy to miss a sign.

Common Mistakes and How to Avoid Them

After a decade in accounting, here are the errors I see most often:

  • Forgetting to record small fees – That $5 monthly charge adds up. Set a recurring reminder to enter it.
  • Recording bank errors as adjusting entries – If the bank deposits $100 extra, don't book it. Call the bank. Your books are correct.
  • Mixing up debit and credit – A service charge reduces cash (credit) and increases expense (debit). Easy to flip.
  • Not updating the accounts receivable for NSF – You still need to collect from the customer. Don't just write off the cash.
  • Ignoring prior month adjustments – If you made an adjusting entry last month that didn't clear, check if it reversed properly.

Frequently Asked Questions

How do I record a bank error adjustment if the bank already corrected it?
If the bank corrected the error on their statement (e.g., reversed an erroneous charge), you don't need an entry because your books were correct all along. Only adjust if the correction affects your recorded balance—like when the bank corrected a deposit you hadn't yet recorded. Then you'd book the deposit.
What if I find an error in a previous month's reconciliation after posting?
Don't panic. If the error affects this month's cash balance, make a correcting entry now. For example, if you understated a check last month, debit the original expense and credit cash. If the error is from a year ago, consider materiality; small errors can be netted with current period adjustments.
Can adjusting entries affect net income?
Absolutely. Service charges increase expenses, interest revenue increases income, NSF checks don't affect net income (they just move cash to receivable), but errors in expenses do. So always review the income statement impact.
Why do some accountants use a clearing account for bank adjustments?
A clearing account (like “Bank Reconciliation Adjustments”) can help track all adjustments before posting to cash. But I prefer direct entries to cash because it's cleaner. The clearing account is useful if you reconcile after month-end close and need to reverse entries later.

This article has been fact-checked for accuracy and reflects real-world accounting practices.