The bank reconciliation begins when a bank statement is received (or alternatively, when the business views its account online). It involves a number of steps which may be completed in a different order to that shown below.
1 Check the opening balance
To start a reconciliation you should first obtain the Bank Reconciliation Statement that was prepared at the end of the previous accounting period; e.g. at the end of the previous month.
You would then check whether the reconciling items (i.e. the uncleared lodgements and unpresented cheques) shown on the previous period’s bank reconciliation statement are shown on the latest bank statement. If one of these transactions has cleared the account then nothing further needs to be done, if however a transaction has not cleared the account we must remember to include it in the next bank reconciliation statement.
A business’ Cash Book and bank statement for April is shown below.
The Cash Book balance on 1st April is £1,926 and this agrees to the balance on the same date on the bank statement. A bookkeeper would then “tick-off” or highlight the opening balances in both documents (to indicate that these items have been checked and agree) – see below
2 Ticking-off the receipts
Next, we will check whether the receipts shown on the bank statement appear in the Cash Book. If they do, we will tick them off. If however, a receipt appears on the bank statement but is missing from the Cash Book we should update the Cash Book so that the receipt is recorded.
When ticking-off receipts you should note the following:
- The date of a particular receipt on the bank statement may be slightly later than the date in the Cash Book as money can take time to clear into the bank account.
- Sometimes, a single receipt shown on a bank statement might consist of two or more receipts recorded in the Cash Book. When a number of cheques are paid into a bank account using a paying-in slip the bank statement will just record the total paid in.
In our example we can see that the bank receipt of £2,887 on 11th April in the bank statement is the receipt from Stevens dated 8th April in the Cash Book.
With a little work we can also see that the receipt of £2,090 on 15th April in the bank statement consists of the receipts from Forte (£1,544) and from Kirkhold (£546) on 12th April in the Cash Book.
The only other receipt on the bank statement is a transfer of £700 from Pupa on 25th April. As this does not tie up to any receipt in the Cash Book we should update the Cash Book for this amount.
We have therefore ticked-off all the receipts on the bank statement but you will note that two receipts are recorded in the Cash Book but are not shown on the bank statement on or before the end of April. The receipts from Jubilee for £899 and Rusk for £95 are therefore uncleared lodgements and will need to be included in the Bank Reconciliation Statement.
3 Ticking-off the payments
Next, we will check the payments recorded on the bank statements against the payments recorded in the Cash Book for April.
The payment on the bank statement of £650 on 6th April can be ticked off to the payment of the same amount to Smith & Co on 2nd April. In addition payments of £105 and £2,711 also appear in both the bank statement and Cash Book and can be ticked-off.
There are three payments that appear on the bank statement but are not entered in the Cash Book. These are the payment of £243 to UK Phones on 9th April, the payment of £1,450 to Tudor Rents on 24th April and the payment of bank charges of £32 on 28th April. The Cash Book must therefore be updated for these unrecorded payments.
All payments on the bank statement for April have now been ticked off to payments in the Cash Book but you will note that there are two payments in the Cash Book that have not cleared the bank account by the end of April. These are the payments of £643 to Lunar on 21st April and £331 to Ovid on 26th April. These are unpresented payments and must be included as such when preparing the Bank Reconciliation Statement.
4 Calculate the balance in the Cash Book
As we have now recorded all the formerly missing receipts and payments in the Cash Book we can now calculate the Cash Book balance at the end of April (and of course at the start of May).
5 Prepare the Bank Reconciliation Statement
The balance at the end of April as per the Cash Book is £2,432 whilst it is £2,412 on the bank statement. The difference should be explained by the timing differences (i.e. uncleared lodgements and unpresented cheques) that we identified when ticking-off the receipts and payments.
The bank reconciliation statement is shown below.
Note that if the difference between the two balances is not explained by timing differences we would investigate the error(s) that must have been made before correcting them.