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). The 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 differences between what the bank has recorded and what the business 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
- Receipts in the cash book not on bank statement.
- Payments in the cash book not on bank statement.
- Errors on the bank statement
Items which affect the cash book
- Receipts on bank statement not in the cash book.
- Payments on bank statement not in the cash book.
- 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.
|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
|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:
|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:
|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. The process is summarized in the diagram below.
How to Prepare Bank Reconciliation Statement
There are a number of reconciliation procedures involved in preparing the bank reconciliation statement.
Write up the Cash Book
Before attempting the reconciliation write up the cash book as fully as possible by using the following process.
- Look at the reconciling items from the previous bank reconciliation. Place a tick against both the cash book and bank statement item.
- 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.
- 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.
- 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 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.
- Locate the bank statement balance and insert this onto the bank reconciliation statement at the top.
- Rule off the cash book and calculate the balance.
- 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 recon, 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.
- 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.
- Prepare the first statement of the bank recon to arrive at the adjusted bank statement balance.
- 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.
- 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.
- Prepare the second statement of the bank recon to arrive at the adjusted cash book balance.
- Using the two statements, compare the adjusted bank statement balance with the adjusted cash book balance. If the 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 reconciliation problems are eliminated.
Post Adjusting Journal Entries
Following the completion of the 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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.