Bank reconciliation

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A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation's bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records at a particular point in time.[1]

Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the organisation's books, or either the bank or the organization itself has made an error.

It may be easy to reconcile the difference by looking at very recent transactions in either the bank statement or the organisation's own accounting records (cash book) and seeing if some combination of them tallies with the difference to be explained. Otherwise it may be necessary to go through and match every single transaction in both sets of records since the last reconciliation, and see what transactions remain unmatched. The necessary adjustments should then be made in the cash book, or any timing differences recorded to assist with future reconciliations.

For this reason, and to minimise the amount of work involved, it is good practice to carry out such reconciliations at reasonably frequent intervals. Reconciliations are generally performed by specialised accounting software though the understanding of what occurs is important for a successful reconciliation. Also, Bank reconciliation statement is a statement prepared on a particular day to reconcile the bank balance as per Cash book or Bank statement showing entries causing difference between the two balances.

Abbreviations[edit]

The following abbreviations are typical abbreviations on a bank statement:

Example[edit]

The following is a worked example[2] of a bank reconcillation problem. To understand this example fully, you should have a good knowledge of general accounting principles.

Question[edit]

The following was obtained from the records of ABC Computers of 30 September 2009

Bank reconciliation statement on 31 August 2009 (Previous month)

££
Balance as per bank statement12200
Outstanding deposit:2100
Total14300
Outstanding cheques:No: 1002200
No: 107740
No: 109540(3480)
Total10820 (Opening balance for cash book)
Cash Book for September 2009
DateDetailsAmount (£)ChequeDateDetailsAmount (£)
3Sales and VAT37001103Water and Electricity
4A Jones2400and VAT400
10Deposit31001114S Payne21100
15Sales and VAT8501129J Kooste350
30Deposit167011310Purchases and VAT2700
11412Salaries4200
115Donation500
11620Purchases and VAT3150
118J Goosen600
Pencil Total11720Pencil Total33000

Bank Statement for September 2009

DebitCreditBalance
Date£££
1Balance12200Cr
4Cheque 111211008900Dr
Deposit37005200Dr
Deposit21003100Dr
5Deposit2400700Dr
SF60760Dr
DO14002160Dr
10Cheque 11320704230Dr
Cheque 1104004630Dr
Deposit31001530Dr
Cheque 1123501880Dr
Cheque 61421804060Dr
CB204080Dr
Cheque 1095404620Cr
SF1004720Dr
12Cheque 1155005220Dr
15Deposit8504370Dr
20Cheque 1186004970Dr
Deposit4050920Dr

Additional information:

  1. Cheque 100 was drawn on the 10 March 2008 to pay a payable. (This cheque is therefore regarded as "stale" for this example - some countries may have different requirements for stale cheques)
  2. ABC Computers signed a debit order for the monthly instalment on their motor vehicle bought from Speedy Car Sales.
  3. Cheque 614 was not drawn by ABC Computers. (Therefore must be taken out of the bank reconciliation)
  4. According to the paid cheques, cheque 112 was drawn for £350 and cheque 113 was drawn for £2070.
  5. A receivable deposited the amount of £4050 owed by him directly into ABC Computers bank account.

Required:

  1. Complete the cash book for September 2009 by starting with the pencil totals.
  2. Prepare the bank reconciliation statement as at 30 September 2009.

Solution[edit]

Compare all amounts in the cash book for September 2009 with the amounts that are present on the bank statement to see if they are the same. All correct amounts should be crossed off on both statements as they do not contain errors. Any erroneous amounts should be marked so that they can be addressed.

Erroneous amounts may include:

  1. Reversed numbers i.e. 164 to 614
  2. Outstanding cheques
  3. Payments received that have not yet been reflected
  4. Errors on cheques
  5. Date discrepancies (though amounts and figures may be correct)

Prepare the following two statements for any bank reconciliation:

Cash book (Bank account) of ABC ComputersDrCr
Balance b/f10820
Pencil total11720Pencil total33000
Payable (Cheque 100)2200Speedy Car Sales1400
Purchases and VAT (Cheque 113)630Bank Charges and VAT (60+20+100)180
Receivable4050
Balance c/f5160
3458034580
Balance b/f5160

Bank reconciliation statement

Bank reconciliationDebitCredit
Balance as per bank statement1100
Erronerous cheque (614)2180
Error on cheque 112 (£530-£350)180
Outstanding deposit1670
Outstanding cheques:
Cheque 1144200
Cheque 1163150
Cheque 106740
Credit balance as per cash book5160
91909190

References[edit]

  1. ^ Carl S. Warren (18 January 2010). Survey of Accounting. Cengage Learning. p. 183. ISBN 978-0-538-74909-1. Retrieved 9 April 2012. 
  2. ^ Introduction to financial accounting: questions and answers to the seventh edition (2nd ed.). LexisNexis. 2009. pp. 143–144. ISBN 978-0-409-10582-7.