Bank Reconciliation
What Is A Bank Reconciliation
Bank reconciliation is the process of matching and comparing figures from accounting records against those presented on a
bank statement. Less any items which have no relation to the bank statement,
the balance of the accounting ledger should reconcile (match) to the balance of the bank statement.
Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account
balance in order to uncover any possible discrepancies.
Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's
system, there is sometimes a normal discrepancy between account balances. The goal of reconciliation is to determine if
the discrepancy is due to error rather than timing.
Comparing The Bank Statement To The Cashbook
When all of the receipts for a period
have been written up in the cash receipts book and all of the cheque payments, standing orders
and direct debits have been entered into the cash payments book, it is necessary
to carry out any further checks possible on the cashbook. The most obvious check is to compare the entries in the cash
receipts and cash payments book for the period, to the entries on the bank statement, although some care does need to be taken here.
Debits and Credits
One of the most obvious differences between the cashbook and the bank statement is that the use of the terms debit and credit appear
to be totally opposed to each other.
If cash is paid into the bank by a business then for the business this is a receipt and is entered in the cash receipts book as
a debit entry. However, in the bank statement this will be described as a credit and the balance will be a credit
balance. This is due to the fact that if a business has money in the bank, the bank effectively owes the money back to the
business and therefore the business is a creditor to the bank.
Similarly, if the business writes a cheque out of the business bank account this will be entered in the cash payments book as a
credit entry. From the bank's perspective however, this is known as a debit entry and any overdrawn balance is a
debit balance.
How To Do A Bank Reconciliation
Summarised, the procedure for performing a bank reconciliation, in four simple steps:
Pre Bank Reconciliation Example
- Compare the cash receipts book to the receipts shown on the bank statement (the credits on the bank statement) - for each receipt that
agrees, tick the item in both the cashbook and the bank statement.
- Compare the cash payments book to the payments shown on the bank statement (the debits on the bank statement) - for each payment that
agrees, tick the item in both the cashbook and the bank statement.
- Any un-ticked items on the bank statement (other than rare errors made by the bank) will be items that should have been entered into
the cash books, but have been omitted for some reason - these should be entered into the cashbook and then the amended balance on the
cashbook can be found. To find the correct cashbook balance a ledger account is used for the bank with the original cashbook
balance shown as the brought forward balance and any additional payments shown as credits and receipts as debits. This is
illustrated in the example.
- Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques and outstanding lodgements - these
will be used to reconcile the bank statement closing balance to the corrected cash book closing balance.
Post Bank Reconciliation - Completing The Double Entry
Opening Balances On The Cashbook & Bank Statement
In our example you may have noted that the opening balance on the cashbook agreed with that of the bank statement - there were no
unpresented cheques or outstanding lodgements at the end of the previous period.
This will not always be the case. If there were timing differences at the end of the previous period, then a
bank reconciliation statement would have to be prepared. When comparing this period's bank statement
and cashbook you will need to have the previous period's bank reconciliation statement in order to be able to tick
last period's timing differences when they appear on the bank statement this period.
Conclusion
When Anne is preparing her bank reconciliation at the end of April, she is likely to find that the unpresented cheques at the
end of March, cheque numbers 103572 to 103574 do appear on the bank statement in April. When they are found on the bank
statement in April, they should then be ticked on the bank statement and on the opening bank reconciliation statement. The
same will happen with the two outstanding lodgements at the end of March, when they appear on the bank statement in April.
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