Bank reconciliation statement
Bank reconciliation makes sure the bank general ledger (cash book) and the bank statement agree. It does this by identifying timing differences, omissions, and errors. In this chapter, you’ll see why differences occur, how to update the cash book, and how to prepare a reconciliation statement so you can report the correct bank balance in the financial statements.
Learning objectives
By the end of this chapter, you should be able to:
- Explain the purpose of bank reconciliations.
- Identify the main reasons for differences between the bank general ledger account and the bank statement/ internet banking records.
- Identify and correct errors and/ or omissions in the bank general ledger account.
- Prepare the reconciliation of the bank general ledger account to the bank statement/ internet banking records.
- Derive bank statements and bank general ledger account balances from given information.
- Identify the bank balance to be reported in the financial statements.
Cashbook and bank statement
Many entities make payments and receive money through a bank rather than using physical cash. These transactions are recorded in the cash book (the bank general ledger account). Periodically (usually monthly), the bank issues a statement showing the opening balance, deposits (credits), withdrawals (debits), and the closing balance.
Because both the entity and the bank are recording the same bank-account activity, the closing balance in the cash book should match the closing balance on the bank statement. In practice, the two balances often differ.
Purpose of bank reconciliation
A bank reconciliation compares the cash book balance with the bank statement balance.
If the two balances don’t agree, you prepare a bank reconciliation statement to explain the difference. The reconciliation helps you:
- identify transactions that are missing from the cash book or the bank statement
- find and correct errors
- make sure deposits, withdrawals, and bank charges are recorded correctly for financial reporting
Reasons for balance discrepancies
Factors that cause a difference between the cashbook and the bank statement balances could be categorised into three (3), namely:
- Unrecorded items and missions by the entity
- Timing differences
- Errors
Omissions or unrecorded items
This happens when transactions appear on the bank statement but have not yet been entered in the entity’s bank ledger account (cash book). These are often items initiated by the bank or by third parties, so the entity may only become aware of them when the bank statement is received.
The following are some specific items that an entity may not have included in the bank general ledger account:
- Bank fees or charges: These are service charges, transaction fees, or maintenance costs deducted directly by the bank.
- Interest earned: This is interest income credited by the bank to the account.
- Direct credits: These are deposits made directly into the account by third parties, which the business may not be immediately aware of until viewing the bank statement.
- Direct debits: These are recurring payments automatically withdrawn from the account by the bank based on pre-authorization by the business. Amounts may not be fixed, and the business does not have control over the payment amounts.
- Standing Orders: These are fixed-amount payments made by the bank based on the instructions of the business to a vendor on predetermined dates.
- Dishonoured Cheques: These are cheques deposited that were subsequently returned due to insufficient funds.
Timing differences
Timing differences arise when the entity and the bank record the same transaction on different dates.
The entity usually records receipts and payments in the cash book as soon as they occur. The bank may process (clear) those transactions later. Until both sides have recorded the transaction, the balances won’t match.
The following are some specific items that may cause timing differences:
- Outstanding or Unpresented Cheques: Cheques issued by the entity and recorded in the cash book but not yet cleared by the bank as at the end of the period. This reduces the cash book balance, but the bank statement balance remains higher until the recipient presents and clears the cheque.
- Deposits in Transit or Uncredited Cheques: Cash or cheques deposited by the entity near month-end but processed by the bank in the following period. The cash book records the deposit immediately (increasing its balance), but it doesn’t appear on the current bank statement until processed.
Errors
Errors occur when mistakes are made either by the entity in recording transactions in the bank ledger account or by the bank in the bank statement.
For example, the entity may record a wrong figure (e.g., GH¢540 instead of GH¢450), duplicate an entry, or make errors when totaling the cash book. On the bank’s side, errors may include posting transactions to the wrong account, incorrect debits or credits, or transposition errors in amounts. These mistakes create discrepancies until they are identified and corrected through the reconciliation process.
Preparation of the BRS
Generally, the preparation of the BRS follows two (2) main processes.
First, adjust the bank general ledger account (cash book) for any errors or omissions in the entity’s records.
Second, reconcile the adjusted bank ledger account with the bank statement balance.
| Bank reconciliation statement (BRS) format | |
|---|---|
| Balance as per bank statement | xxx |
| Add: Uncredited cheques | xxx |
| Less: Unpresented cheques | xxx |
| Add or less bank errors | xxx |
| Adjusted/corrected bank ledger balance | xxx |
Illustration 1: Adjusted cashbook
Ataasa Ltd’s bank ledger account shows a debit balance of £10,400 on 31 July. The bank statement for the same date, on the other hand, shows a credit balance of £9,500. Investigation reveals:
- Cheques issued but not yet presented: £1,200
- Deposit made on 31 July, credited by bank on 1 August: £2,000
- Bank charges debited by the bank, not yet in the cash book: £100
- Standing order (rent) paid by bank, not in cash book: £500
- Customer’s cheque deposited but later dishonoured (bank debited), not in cash book: £400
- A customer made an Electronic Funds Transfer (EFT) directly to the bank, not in the cash book: £600
- Bank error: £300, which belonged to another customer, was wrongly credited to Ataasa Ltd’s account.
Required: (i) Identify the items that affect the cashbook and why?
Do you know the answer?
Items 3, 4, 5, and 6 affect the cash book because they are unrecorded items/omissions.
Here are shorter explanations for each item:
- Bank charges (£100): Deducted by the bank but not yet recorded in the cash book.
- Standing order (£500): Automatic payment made by the bank, not yet entered in the cash book.
- Dishonoured cheque (£400): Previously recorded deposit reversed by the bank and must be adjusted.
- EFT (£600): Direct deposit by a customer that needs to be added to the cash book Items that DO NOT Affect the Cash Book:
- Unpresented cheques of £1,200 - Timing difference (already recorded in cash book).
- Deposit in transit of £2,000 - Timing difference (already recorded in cash book)
- Bank error of £300 - Bank error (does not affect the entity’s records; the bank must correct this)
(ii) Prepare the Adjusted Cash Book (to get the adjusted bank balance)
(iii) Prepare the Bank Reconciliation Statement (BRS) as at 31 July.
| Bank reconciliation statement as at 31 July | |
|---|---|
| £ | |
| Bank statement balance | 9,500 |
| Uncredited cheque | 2,000 |
| Unpresented cheque | (1,200) |
| Bank error: wrong credit | (300) |
| Balance as per adjusted cash book | 10,000 |
Illustration 2: Determining the bank statement balance
On 31 March, the cashbook (bank ledger account) of Nkunim Ltd showed a debit balance of $12,600. Cheques issued but not yet presented total $2,800, while a deposit of $1,500 made on 31 March has not yet been credited by the bank. Bank charges of $200 and a standing order of $400 have not been recorded in the cash book.
Required: Based on this information, determine the Bank Statement Balance as at 31 March. Suggested Solution
Do you know the answer?
| Bank reconciliation statement as at 31 March | |
|---|---|
| $ | |
| Bank ledger account balance (DR) | 12,600 |
| Bank charges | (200) |
| Standing order | (400) |
| Adjusted cashbook balance (bank ledger) | 12,000 |
| Uncredited cheque | (1,500) |
| Unpresented cheque | 2,800 |
| Balance as per bank statement | 13,300 |
Notes for Clarity: The solution combined the determination of the adjusted cashbook balance in the BRS. Because the BRS started with the adjusted cashbook balance, the unpresented cheque was added and the uncredited cheque subtracted. This is the direct opposite of the illustration one format.