Bank Reconciliation

Objectives: At the end of this tutorial students should be able to do the following:

1. Define the term bank reconciliation.
2. State reasons why carrying out a bank reconciliation is important for a business.
3. Explain why at any given point in time the bank account balance of the business' cashbook may differ with the business' bank balance on the bank statement.
4. Update the business' bank balance in the cashbook.
5. Prepare a Bank Reconciliation Statement.
   

Definition of bank reconciliation:
Bank reconciliation is the process of updating the bank balance in a company’s cashbook and then reconciling it to the balance on the company’s bank statement.

Bank reconciliation is necessary for the following reasons:

1. To determine the amount of cash a company controls and should report on its balance sheet.
2. To ensure that all and only bona fide transactions have been posted to the bank account in the cashbook.
3. To discover fraud or embezzlement.
4. To discover errors in the cashbook or on the bank statement.
5. To monitor stale-dated cheques.

Reasons why the bank balance in the company's cashbook may differ from the bank balance on the bank statement:

The bank balance in the cashbook may differ from that of the bank statement because of timing differences. Timing differences occur when a transaction is recorded in either the cash book or on the bank statement, but not in both at the point in time when the bank statement is generated. Some of the factors that may cause timing differences include:

1. Deposits in transit - receipts posted in the bank column of the cashbook but not yet recorded by the bank.
2. Outstanding or unpresented cheques - cheques issued by the business but not yet presented to the bank for payment.
3. Standing orders – periodic payments made to suppliers by the bank on the instructions of the business, that are not recorded in the cashbook until the bank statement reaches the business.
4. Bank charges or bank interest debited or credited directly to the business' bank account by the bank.
5. Direct debits - Payments made by customers or other parties directly to business' bank account, which were not recorded in the cashbook but recorded by the bank.
6. Insufficient funds  or dishonored cheques - cheques returned by the bank due to insufficient funds in the payee’s account.
7. Errors - either in the cashbook or on the bank statement.

 
 Steps to follow to when reconciling the bank account:

1. Compare the bank statement to the cash book, highlight all the items that do not that appear in both the cash book and the bank statement.
2. Update the bank balance in cash book by entering all the legitimate items that appear on the bank statement but not in the cash book.
3. Carry out the reconciliation by adjusting for any items that appear in the cash book but not on the statement and adjusting for bank errors if any.

Below is a generic format used for bank reconciliation:

Summary of bank reconciliation steps:

1. Note all the items that do not appear in both the cash book and the bank statement.
2. Update the bank balance in cash book by entering all the legitimate items that appear on the bank statement but not in the cash book.
3. Carry out the reconciliation by adjusting for any items that appear in the cash book but not on the statement and adjusting for bank errors if any.

I hope that you found this tutorial helpful, if you did please share it and feel free to ask questions or to comment below! Good luck!