Bank Reconciliations

Introduction

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 record of the bank account.

The cash book is the double entry record of cash and bank balances contained within the nominal ledger accounting system. It is, in effect, the cash control 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

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 the business' records should correspond with the bank statement.

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

• The ledger account maintained by the bank is the opposite way round to the cash book. This is because the bank records balances from their perspective. Therefore if a client has a positive bank balance the bank would display this as a credit balance because they have a liability to pay it back to the client. If the client is overdrawn this would be shown as a debit because the bank are owed a repayment from the client.
• 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.
• Items such as interest may appear on the bank statement but are not recorded in the cash book as the business 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.

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

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.

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 a company 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 the sender's statement until, say, 6 April. The sender 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/lodgements

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.

Proforma bank reconciliation

Cash book

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.

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Tags:	bank reconciliation;unpresented cheques;outstanding lodgements;timing differences