What is a bank reconciliation?
A bank reconciliation is a process undertaken by accountants or bookkeepers at the end of an accounting period. Transactions recorded on the bank statement (or on the bank’s online records) are compared with the transactions in the organisation’s Cash Book. Its purpose is to help ensure that all bank receipts and payments are properly recorded and that the bank statement balance and the Cash Book balance can be reconciled (i.e. explained as described in this section).
Why do we carry out bank reconciliations?
It is vital for all businesses to know how much money they hold in their bank accounts. If they don’t they run a higher risk of paying an amount that will be dishonoured by the bank which can then damage its relationships with suppliers and the bank. In addition, the bank reconciliation process increases the likelihood that any errors made by the business or its bank will be identified and then corrected.
How often should we complete a bank reconciliation?
This will depend on the business; some will carry out a reconciliation at the end of every day, whilst others might choose to do it monthly. As a rule of thumb, a business should carry out a reconciliation every time it receives a bank statement.
Why might there be a difference between the bank statement and the Cash Book balances?
There are two main reasons why there might be a difference between the balance shown on a bank statement for a particular date and the balance for the same date recorded in either the business’ Cash Book or the Bank Control account in the General Ledger.
- Errors and omissions
- Timing differences
1 Errors and omissions
Errors can be made by both the business in its books and by the bank who might process a transaction incorrectly.
When a bookkeeper identifies that an error has been made in its Cash Book or in its Bank Control account, he or she should correct this, typically by using a journal (we shall cover how errors are corrected in the later sections of this course).
When a bookkeeper discovers that an error has been made by its bank, he or she should contact the bank to inform them of their error (even if the error is in the business’ favour).
Omissions occur when a payment or receipt appears in the bank statement but not in the Cash Book. The most common omissions relate to electronic transactions such as online receipts, standing order/direct debit payments as well as bank charges and interest. This is because the receipt of the bank statement might be the first time a bookkeeper becomes aware of a particular transaction, or knows for certain of the amount paid or received.
When a bank receipt or payment has been omitted, the bookkeeper will usually update the Cash Book and it is for this reason that most bookkeepers will wait for a bank statement to be received before calculating the closing balance in its Cash Book or Bank Control account.
2 Timing differences
There is often a delay in money being paid into or being paid out of a bank account and that money appearing on a bank statement.
Illustration
Let’s say a business posts a cheque to a supplier at the month end. The business’ bookkeeper will record this payment as being made at the month end but it will take a number of days before that cheque clears the business’ bank account. This is because the cheque is likely to be in the postal system for a day or two before it arrives at the supplier’s address, there might then be a delay between it being received and being submitted to the supplier’s bank and lastly there will be a delay before the money is transferred from the business’ bank account to the supplier’s bank account.
As a consequence of the above, when the bookkeeper calculates the bank balance at the month it will be lower than the balance shown at the month end on the bank statement. The difference will be the value of the cheque issued at the month end.
Uncleared lodgements and unpresented payments
When explaining the difference between the balance on a bank statement and the balance in the Cash Book (or Bank Control account) we often use the terms “uncleared lodgement” and “unpresented payments.” These terms are described as follows:
Uncleared lodgement. This is an amount paid into a bank account on or before the date the account is reconciled but which appears on the bank statement at a later date. The most common type of uncleared lodgement are cheques paid into the account shortly before the period end.
Unpresented payment. This is an amount paid from a bank account on or before the date the account is reconciled but which appears on the bank statement at a later date. The most common type of unpresented payment are cheques paid from the account shortly before the period end and electronic payments made on the period end but after the bank’s close of business (as these transactions are likely to be processed the next day).
Bank Reconciliation Statements
Bank reconciliations involve the preparation of Bank Reconciliation Statements. These statements explain the difference between a Cash Book balance and the balance on a bank statement in terms of the timing differences detailed above.
A bank reconciliation statement can be organised in two ways, it can start from the bank statement balance and work towards the cash book balance or it can start from the cash book balance and work towards the bank statement balance. Both ways are perfectly acceptable and students should read their exam questions carefully to ensure that they complete the reconciliation in the manner requested.
From the Bank Statement to the Cash Book balance
An example of a bank reconciliation statement starting from the bank statement balance is shown below. Note that uncleared lodgements are added to the balance and unpresented payments are deducted from the balance. Note also that we would normally record the cheque numbers and payslip reference numbers in our statement but if these are not available we would record the name of the customer or the supplier.
Note also, that if the bank balance is an overdraft we would show that number as a negative.
| Bank statement balance as at 31/01/20XX | £1,522 | |
| Add uncleared lodgments: | ||
| cc. 1048 A Smith | £120 | |
| cc. 1049 K Jones | £795 | |
| Total additions (120+795) | £915 | |
| Less unpresented payments | ||
| Chq 881766 P Murphy | £1,006 | |
| Chq 881767 W Fraser | £48 | |
| Total deductions (1006+48) | £1,054 | |
| Cash Book balance as at 31/01/20XX (1522+915-1054) | £1,383 |
Alternatively, the bank reconciliation statement could be presented as show below. Here we start from the Cash Book balance and then add any unpresented payments and deduct any uncleared lodgements in order to move to the bank statement balance.
| Cash Book balance as at 31/01/20XX | £1,383 | |
| Add unpresented payments: | ||
| Chq 881766 P Murphy | £1,006 | |
| Chq 881767 W Fraser | £48 | |
| Total additions (1006+48) | £1,054 | |
| Less uncleared lodgements | ||
| cc 1048 A Smith | £120 | |
| cc 1049 K Jones | £795 | |
| Total deductions (1006+48) | £915 | |
| Bank Statement balance as at 31/01/20XX (1383+1054-915) | £1,522 |
“Debits” and “credits”
Before we look at an illustration of the reconciliation process it is worthwhile noting how banks use the terms “debit” and “credit” as this can cause some confusion amongst accounting and bookkeeping students.
When banks use these terms you must remember that they do so from their own perspective. So if a bank says a business’ account is in credit it means that the bank owes the business that amount of money. From the business’ perspective however, the bank account is a debit balance (i.e. an asset) as the bank holds money on their behalf.
[Nb. This problem is perhaps less significant than it used to be as many banks now use positive and negative numbers on their statements rather than referring to debits and credits.]
