Bank Errors

Bank errors are mistakes made by a bank in recording transactions on a customer's account. Typical examples include posting a check for the wrong amount, charging a check or electronic debit belonging to another customer, crediting a deposit to the wrong account, recording the same item twice and charging a fee that should not apply. They show up when the depositor compares the bank statement with its own records.

In accounting, bank errors matter mainly in the bank reconciliation. Because the error is in the bank's records rather than the company's, it is corrected on the bank side of the reconciliation, and the company does not change its own books. Instead, it notifies the bank, which should correct the account in a later statement.

Suppose you and a friend each keep a list of what you owe each other, and you compare lists at the end of the month. If your friend's list shows a $50 loan you never received, you do not change your own list; you point out the mistake and ask your friend to fix theirs.

A bank error works the same way. The company's records are right, the bank's are wrong, so the company asks the bank to correct its records and, in the meantime, notes the difference when it compares the two.

• Encoding errors. The amount encoded on a check differs from the written amount, so a $1,250 check clears as $1,520.
• Misposted items. A check, wire or ACH debit belonging to another customer is charged to the account, or a deposit is credited to someone else.
• Duplicate postings. An item, often an electronic payment or a remote deposit, is posted twice.
• Incorrect fees or interest. Service charges are applied at the wrong rate or to the wrong account.
• Omitted deposits. A deposit made at a branch or night depository is not credited at all.

Bank errors are relatively rare compared with timing differences such as outstanding checks and deposits in transit, and with the depositor's own mistakes. When a reconciliation does not balance, the bookkeeper should check the company's records first, but should never assume the bank is always right.

A bank error is an adjustment to the balance per bank. If the bank charged the account $600 for a check belonging to another company, the $600 is added back to the bank balance on the reconciliation. If the bank recorded a $2,000 deposit as $200, the $1,800 shortfall is added to the bank balance. No journal entry is made in the company's general ledger, because the book balance is already correct.

This is the key difference from book errors. When the company itself made the mistake, for instance recording a $450 check as $540, the correction is made on the book side and a journal entry is required. Classifying an error correctly is therefore important: a bank error wrongly booked as a company adjustment would leave the ledger out of line with reality once the bank corrects its records.

Depositors should report suspected bank errors promptly. For business accounts, the Uniform Commercial Code requires customers to examine statements with reasonable promptness, and bars claims for unauthorized signatures or alterations not reported within one year; many deposit agreements set shorter deadlines. For consumer electronic transfers, Regulation E sets out an error resolution process with its own notice periods and investigation timelines, as described under error resolution.

Until the bank confirms the correction, the reconciling item should be tracked each month. A bank error still uncorrected after one or two statements needs follow-up, since the bank and company balances will otherwise stay apart and the item may be overlooked.

A regular reconciliation is how most bank errors are caught, which is one reason it is a core internal control. Good practice is for the reconciliation to be prepared or reviewed by someone who does not handle cash or record receipts, consistent with segregation of duties. Companies with high volumes often use automated reconciliation and services such as positive pay, which compares checks presented with a list of checks issued and flags mismatches before they are paid. These tools also help detect fraud, since an apparent "bank error" may turn out to be an altered check or an unauthorized debit.