Bank Reconciliations

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1 Introduction

There are many errors that can be made in the bookkeeping – for example, it is very easy to enter a number incorrectly – and it is therefore important to carry out as many checks as possible on the accuracy.

One of the most obvious checks is to compare the cash book with the bank statement. The balance on both should be the same. If there are any errors then this check should discover that they exist.

In principle this check is very simple, but it can be a little more involved due, mainly, to the use of cheques in many countries.

2 Terminology

Before we explain the nature of bank reconciliations, it is important to make sure that you are familiar with the terminology related to bank transactions.

Balance on bank statement

One important aspect to be aware of is that if you put money into the bank, the bank statement will show a credit balance. This is despite the fact that in the books of the business we will debit the cash account and say that we have a debit balance. The reason for this is that the bank statements is a reflection of the balance on your account in the books of the bank. As far as the bank is concerned, they owe you money – hence the credit balance.

It is very easy to get confused in an exam question, and so be very careful. A credit balance on the bank statement means that you have money, whereas a debit balance on the bank statement means that you are overdrawn.

Cheques

Drawer (of cheque)

Unpresented cheques (or outstanding cheques)

Deposits not yet credited

Dishonoured cheques

Credit transfers

Standing orders

Direct debits

3 Reasons why the balance on the bank statement may differ from the balance in the cash account

If there is a difference between the balance on the bank statement and the balance in the cash account, then clearly we need to find out why.

There are three types of situations that can result in a difference:

• cash book errors and omissions

Examples:

  If there are any cash book errors or omissions, then these must be corrected

• bank mistakes

Examples:

If there are any errors by the bank, then the bank must be informed and these errors corrected by the bank

• ‘timing differences’

Even if all the entries in the bank statement and the cash book are correct, the two balances are unlikely to agree. This is because of unpresented cheques and lodgements not credited. The receipts and payments have been correctly entered in the cash book, but because of the time delay they have not yet appeared in the bank statement. This is not a mistake on the bank’s part – the transactions will appear at some time in the future – and so no correction is necessary. However, if we list the unpresented cheques and lodgements not yet credited, we should be able to explain (or reconcile) the difference between the balances. If we cannot reconcile the two then there must be errors remaining which we must find.

The statement reconciling the balances is called a bank reconciliation statement.

4 The preparation of a bank reconciliation statement

1. compare the cash account to the bank statement and tick off all items that agree

2. any remaining items must be either errors or timing differences

3. correct any errors in the cash account by putting through the necessary debits or credits (in the examination write up a t-account, starting with the balance given in the question and ending with the correct balance)

4. prepare a bank reconciliation statement. This is always a statement (not a t-account), starting with the balance on the bank statement, listing any bank errors and timing differences, and ending with what should be the corrected balance in the cash account.

Pro-forma bank reconciliation statement:

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