Chapter 12: Bank reconciliations

Chapter learning objectives

Upon completion of this chapter you will be able to:

  • describe the purpose of bank reconciliations
  • identify the main differences between the cash book and the bank statement
  • identify the bank balance to be reported in the final accounts
  • correct cash book errors or omissions
  • prepare bank reconciliation statements
  • derive bank statement and cash book balances from given information.

1 The bank reconciliation

The objective of a bank reconciliation is to reconcile the difference between:

  • the cash book balance, i.e. the business’ record of their bank account, and
  • the bank statement balance, i.e. the bank’s records of the bank account.

Note that debits and credits are reversed in bank statements because the bank will be recording the transaction from its point of view, in accordance with the business entity concept.

Reasons to prepare a bank reconciliation statement

Nature and purpose of a bank reconciliation statement.

The cash book records all transactions with the bank. The bank statement records all the bank’s transactions with the business.

The contents of the cash book should be exactly the same as the record provided by the bank in the form of a bank statement, and therefore our records should correspond with the bank statement.

This is in fact so, but with three important provisos:

(1) The ledger account maintained by the bank is the opposite way round to the cash book. This is because the bank records the balance in favour of an individual as a credit balance, i.e. a liability of the bank to the individual. From the individual’s point of view it is, of course, an asset, i.e. a debit balance in his cash book.

(2) Timing differences must inevitably occur. A cheque payment is recorded in the cash book when the cheque is despatched. The bank only records such a cheque when it is paid by the bank, which may be several days later.

(3) Items such as interest may appear on the bank statement but are not recorded in the cash book as the cashier is unaware that they have arisen.

The existence of the bank statement provides an important check on the most vulnerable of a company’s assets – cash. However, the differences referred to above make it essential to reconcile the balance on the ledger account with that of the bank statement.

The reconciliation is carried out frequently, usually at monthly intervals.

2 Differences between the bank statement and the cash book

When attempting to reconcile the cash book with the bank statement, there are three differences between the cash book and bank statement:

  • unrecorded items
  • timing differences
  • errors

Cash book adjustments

Unrecorded items

These are items which arise in the bank statements before they are recorded in the cash book. Such ‘unrecorded items’ may include:

  • interest
  • bank charges
  • dishonoured cheques.

They are not recorded in the cash book simply because the business does not know that these items have arisen until they see the bank statement.

The cash book must be adjusted to reflect these items.

Test your understanding 1

On which side of the cash book should the following unrecorded items be posted?

  • bank charges
  • direct debits/standing orders
  • direct credits
  • dishonoured cheques
  • bank interest.

Bank reconciliation adjustments

Timing differences

These items have been recorded in the cash book, but due to the bank clearing process have not yet been recorded in the bank statement:

  • Outstanding/unpresented cheques (cheques sent to suppliers but not yet cleared by the bank).
  • Outstanding/uncleared lodgements (cheques received by the business but not yet cleared by the bank).

The bank statement balance needs to be adjusted for these items:

Errors in the cash book

The business may make a mistake in their cash book. The cash book balance will need to be adjusted for these items.

Errors in the bank statement

The bank may make a mistake, e.g. record a transaction relating to a different person within our business’ bank statement. The bank statement balance will need to be adjusted for these items.

Outstanding payments and receipts

Outstanding or unpresented cheques

Suppose a cheque relating to a payment to a supplier of Poorboy is written, signed and posted on 29 March. It is also entered in the cash book on the same day. By the time the supplier has received the cheque and paid it into his bank account, and by the time his bank has gone through the clearing system, the cheque does not appear on Poorboy’s statement until, say, 6 April. Poorboy would regard the payment as being made on 29 March and its cash book balance as reflecting the true position at that date.

Outstanding deposits

In a similar way, a trader may receive cheques by post on 31 March, enter them in the cash book and pay them into the bank on the same day. Nevertheless, the cheques may not appear on the bank statement until 2 April. Again the cash book would be regarded as showing the true position. Outstanding deposits are also known as outstanding lodgements.

3 Proforma bank reconciliation

Bank reconciliation statement as at …..

  • Beware of overdrawn balances on the bank statement.
  • Beware of debits/credits to bank statements.
  • Beware of aggregation of deposits in a bank statement.
  • Note that the bank balance on the statement of financial position is always the balance per the revised cash book.

Test your understanding 2

In preparing a company’s bank reconciliation statement, the accountant finds that the following items are causing a difference between the cash book balance and bank statement balance:

(1) Direct debit $530.

(2) Lodgements not credited $1,200.

(3) Cheque paid in by the company and dishonoured $234.

(4) Outstanding cheques $677.

(5) Bank charges $100.

(6) Error by bank $2,399 (cheque incorrectly credited to the account).

Which of these items will require an entry in the cash book?

A 3, 4 and 6

B 1, 3 and 5

C 1, 2 and 4

D 2, 5 and 6

Test your understanding 3

The following information has been extracted from the records of N Patel:

High Street Bank

Bank Statement – N. Patel

(a) Prepare a bank reconciliation statement at 1 December.

(b) Update the cash book for December.

(c) Prepare a bank reconciliation statement at 31 December.

Test your understanding 4

The following is a summary of Ami’s cash book as presented to you for the month of December 20X6:

All receipts are banked and payments made by cheque.

On investigation you discover:

(1) Bank charges of $136 entered on the bank statement had not been entered in the cash book.

(2) Cheques drawn amounting to $267 had not been presented to the bank for payment.

(3) A cheque for $22 had been entered as a receipt in the cash book instead of as a payment;

(4) A cheque drawn for $6 had been incorrectly entered in the cash book as $66.

What balance is shown on the bank statement at 31 December 20X6?

A $913

B $941 overdraft

C $941

D $407 overdraft

Chapter summary

Test your understanding answers

Test your understanding 1

Test your understanding 2

The correct answer is B

Test your understanding 3

Test your understanding 4

The correct answer is D

Created at 8/24/2012 11:03 AM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 8/24/2012 11:03 AM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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