Bank reconciliation statements

Last time

Before we start: last time, in Source documents, books of prime entry and discounts, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Why two balances differ

The business's cash book says it has one balance in the bank; the bank statement says another. Usually neither is wrong: they record things at different times. A bank reconciliation statement explains the difference, and finds real errors.

Why the balances differ

Some items are in the cash book but not yet on the bank statement: timing differences. Some items are on the bank statement but not yet in the cash book, because the business only learns of them from the statement. And sometimes there are errors, by the business or the bank.

Timing differences

Unpresented cheques: cheques the business has paid out and recorded, but the payee has not yet paid into their bank. Outstanding lodgements: money paid into the bank and recorded, but not yet shown on the statement. These go in the reconciliation statement, not the cash book, because the cash book is already correct.

Items only the bank knew

Bank charges and interest charged; direct debits and standing orders paid automatically. Credit transfers received directly from customers, and interest received. Dishonoured cheques: a customer's cheque that bounced. All of these are entered in the cash book first.

The two steps

First update the cash book with the items only the bank knew, and find its corrected balance. Then prepare the reconciliation statement for the timing differences.

The reconciliation statement

Start with the balance on the bank statement. Add outstanding lodgements, which the bank will soon add. Subtract unpresented cheques, which the bank will soon take away. The result should equal the corrected cash book balance.

A statement, worked

The bank statement shows 982 dollars. Add an outstanding lodgement of 150 and subtract unpresented cheques of 300. The answer, 832, should agree with the corrected cash book.

Debit or credit on the statement

The bank sees the account from its side. Money the business has in the bank is a credit on the bank statement. So a credit balance on the statement matches a debit balance in the cash book. An overdraft is a debit on the statement and a credit in the cash book.

Why reconcile?

It finds errors in the cash book or by the bank. It brings the cash book up to date with charges and direct payments. And it helps detect fraud, and shows cheques that are taking too long to be presented.

Working backwards

Sometimes the question gives the bank statement balance and asks for the cash book balance. Use the same statement and solve for the missing figure. Check whether you are adding or subtracting each item: think about what the bank will do when it catches up. Show every step with labels, so method marks are earned.

Mistakes that lose marks

Mistake one: putting unpresented cheques in the cash book. They are already there. Mistake two: adding unpresented cheques to the bank balance. They are subtracted. Mistake three: forgetting the bank statement shows the account from the bank's side. The fix: update the cash book first, then reconcile the timing items.

The full-marks tip

The full-marks tip: update the cash book for items only the bank knew, then reconcile for timing differences. On the statement: add lodgements, subtract unpresented cheques.

On one card

So, on one card: bank reconciliation. Keep it for revision.