Bank Reconciliation

What is a Bank Reconciliation

The bank reconciliation process is a means of ensuring that the cash book of the business is reconciled to the bank statement provided by the bank.

What is Bank Reconciliation Statement?

The bank reconciliation is prepared as a statement called the Bank Reconciliation Statement (not to be confused with the bank statement which you received from the bank).

A bank reconciliation should be prepared on a regular basis (daily, weekly or monthly) dependent on the size of the firm and how many transactions are being processed through the cash book.

Purpose of Bank Reconciliation

The purpose of the bank reconciliation exercise is to highlight the difference between what the business has recorded and what the bank has recorded, in this way it can act as an independent check on the business records.

Most differences highlighted by the bank reconciliation procedure are due to timing differences as one organisation may have posted an item which the other has not.

For example, if a business writes a check, it will post it to its cash book that day and then send it on to its supplier. The supplier will receive the check days later, and send it on to its bank. The check then passes through the banking system and eventually, a few more days later, it is processed by the bank of the business and posted to its account (bank statement). The period of days between the business posting the check and the bank posting the check results in items in the cash book not on the bank statement. These checks are normally referred to as unpresented checks.

The point of the bank reconciliations is to record these known timing differences and attempt to reconcile the bank statement balance to the cash book balance. If the two balances do not reconcile then either there is a mistake in the preparation of the bank reconciliation accounting or there are errors in the cash book or errors on the bank statement which then need to be investigated.

Bank Reconciliation Format

The bank reconciliation statement format is determined by the fact that there are only three types of entry in the cash book and bank statement, which are receipts, payments, and errors. Any differences between the cash book and the bank statement therefore fall into one of these types.

Items which affect the bank statement

  1. Receipts in the cash book not on bank statement.
  2. Payments in the cash book not on bank statement.
  3. Errors on the bank statement

Items which affect the cash book

  1. Receipts on bank statement not in the cash book.
  2. Payments on bank statement not in the cash book.
  3. Errors in the cash book

Using these posting types, the bank reconciliation then takes an outline format of two statements, the first adjusting the bank statement balance to arrive at the adjusted bank statement balance, and the second adjusting the cash book to arrive at the adjusted cash book balance, as follows:

The first statement adjusts the bank statement balance.

Adjusted bank statement balance – Example bank reconciliation form
 Bank statement balance x
Add Receipts in the cash book not on the bank statement x
Deduct Payments in the cash book not on the bank statement x
Add/deduct Errors on the bank statement x
 Adjusted bank statement balance x

The second statement adjusts the cash book balance

Adjusted cash book balance – Example bank reconciliation form
Cash book balance x
Add Receipts in bank statement not in the cash book x
Deduct Payments in bank statement not in the cash book x
Add/deduct Errors in the cash book x
 Adjusted cash book balance x

If done correctly, the final balance on the two statements should agree, that is to say, the adjusted bank statement balance should be the same as the adjusted cash book balance.

How to do a Bank Reconciliation

Within each of the types of entry referred to above there are a number of common examples.

Receipts in the cash book not on bank statement

  • Cash received by the business, posted to the cash book, but not yet banked.
  • Possibility of cash fraud, as cash has been received and recorded but not banked.
  • Posting errors in the cash book.

Payments in the cash book not on bank statement

  • As mentioned above, cheques sent to a supplier and posted to the cash book but not yet processed by the bank.
  • Posting errors in the cash book.

Receipts on bank statement not in the cash book

  • Bank interest received from the bank posted by the bank to the bank statement but which the business is only aware of on receipt of the bank statement.
  • Bank transfers from customers.
  • Posting errors in the bank statement.

Payments on bank statement not in the cash book

  • Interest paid to the bank charged to the bank statement but which the business is only aware of on receipt of the bank statement.
  • Bank charges.
  • Standing orders.
  • Direct debits.
  • Posting errors in the bank statement.
  • Possibility of cheque fraud when a cheque have been sent to the bank for payment but deliberately not recorded in the cash book.

Bank Reconciliation Example

A bank reconciliation sample with numbers inserted is shown below

The first statement to adjust the bank statement balance is as follows:

Adjusted bank statement balance – Sample bank reconciliation form
 Bank statement balance 4,000
Shop Receipts not yet banked 050613 1,500
Shop Receipts not yet banked 060613 1,000
Add Receipts in the cash book not on the bank statement 2,500
Unpresented Cheque 000567  030613 -800
Unpresented Cheque 000489  030613 -400
Deduct Payments in the cash book not on the bank statement -1,200
Add/deduct Errors on the bank statement 0
 Adjusted bank statement balance 5,300

The second statement to adjust the cash book balance is as follows:

Adjusted cash book balance – Sample bank reconciliation form
Cash book balance 5,000
Interest received on bank statement 45 070613 400
Add Receipts in bank statement not in the cash book 400
Interest paid bank statement 46 080613 -25
Bank charges statement 48 090613 -75
Deduct Payments in bank statement not in the cash book -100
Add/deduct Errors in the cash book 0
 Adjusted cash book balance 5,300

The adjusted bank statement balance (5,300) is now equal to the adjusted cash book balance (5,300), so the bank reconciliation is complete.

How to Prepare Bank Reconciliation Statement

There are a number of bank reconciliation procedures involved in preparing the bank reconciliation statement.

Write up the Cash Book

Before attempting the bank reconciliation write up the cash book as fully as possible by using the following process.

  1. Look at the reconciling items from the previous bank reconciliation. Place a tick against both the cash book and bank statement item.
  2. Look at the cash book payments and find the corresponding item on the bank statement. Place a tick against both the cash book and bank statement item.
  3. Look at cash book receipts and find the corresponding item on the bank statement. Place a tick against both the cash book and bank statement item.
  4. Check the bank statement for any items not ticked and post these to the cash book. These will include bank interest received and paid, bank changes, standing orders etc.

This process should ensure that reconciling items relating to receipts and payments on the bank statement but not in the cash book are kept to a minimum before preparing the bank reconciliation statement.

Perform the Bank Reconciliation

When the cash book is written up as fully as possible then proceed with the bank reconciliation steps as follows.

  1. Locate the bank statement balance and insert this onto the bank reconciliation statement at the top.
  2. Rule off the cash book and calculate the balance.
  3. Look for receipts in the cash book which have not been ticked. List these on the bank reconciliation statement under Receipts in the cash book not on the bank statement. Note. If you want to mark these items to show you have dealt with them in the bank reconciliation, use a different mark to a tick, as you need to be able to identify them in the next periods reconciliation in step 1 above under Write up the Cash Book.
  4. Look for payments in the cash book which have not been ticked. List these on the bank reconciliation statement under Payments in the cash book not on the bank statements.
  5. Prepare the first statement of the bank reconciliation to arrive at the adjusted bank statement balance.
  6. Look at receipts on the bank statement which have not been ticked. List these on the bank reconciliation statement under Receipts on the bank statement not in the cash book.
  7. Look at payments on the bank statement which have not been ticked. List these on the bank reconciliation statement under Payments on the bank statement not in the cash book.
  8. Prepare the second statement of the bank reconciliation to arrive at the adjusted cash book balance.
  9. Using the two statements, compare the adjusted bank statement balance with the adjusted cash book balance. If the bank reconciliation procedures have been carried out correctly then the two figures should be the same. If the balances are not the same look to see that you have ticked off all items correctly and that there are no arithmetical errors to ensure any bank reconciliation problems are eliminated.

Post Adjusting Journal Entries

Following the completion of the bank reconciliation journals are required to post the adjustments for the reconciling items. The journals vary depending on the type of reconciling items, and typical examples are shown in our bank reconciliation journal entries post.

Bank Reconciliation November 6th, 2016Team

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