Bank reconciliation statements provide a powerful internal control.

Bank Reconciliation Statements – Accounting 101

The verification process in double-entry bookkeeping is critical to ensuring data accuracy; bank statement statements and their reconciliation to bank records form an essential part of this process.

Types of Differences

Differences between bank statements from the bank and the cash books prepared by the business can arise due to errors in processing. The bank may allocate a deposit made by the business to the wrong customer’s account. Or a bank may charge fees when they previously did not. At the same time, a business may allocate a credit sale to the cash book rather than the sales ledger.

Even when neither sets of records contain errors, timing differences in when transactions are recorded in one system but not in another can cause the balances between them to disagree. And these are the most common form of differences between the records, rather than errors within either system.

Timing Differences

As we mentioned, timing differences are the leading cause of differences between a firm’s cash books and the transactions recorded on bank statements. These differences arise from:

Non-Credited Amounts

These transactions typically arise from recording the receipt of physical cash by the firm in its cash books. In contrast, the process of depositing this cash with the bank and recording it in the bank’s records can take a day or two, particularly around weekends and public holidays.

Unpresented Cheques

While the second type of timing difference arises from cheques which the firm issues to pay for goods and services, when the firm issues the cheque, it records this in its cash books as a reduction in cash (the credit entry). At the same time, the debit depends on the purpose of the transaction. For example, the debit would be recorded as expenses if ABC used it to pay the power account for the month.

It is important to note that the firm’s books are not to be updated/changed for these timing differences. Their records are correct, and any differences between their records and the bank’s will be removed as bank records process these transactions.

Cash Book Updating

There are differences between the firm’s and the bank’s records due to the former not being up-to-date. This doesn’t mean the firm’s records are in error, but rather at a point in time, such as month-end, the firm is unaware of receipts or payments in its bank account.

Examples of these types of reconciling items include:

  • payments received from customers for accounts on credit (debtors);
  • interest received from or paid to the bank;
  • bank fees and charges; and
  • previously presented cheques by the firm to the bank for deposit that are subsequently dishonored or “bounced” due to perhaps the payer having insufficient funds in their account.

These are some of the main timing differences that can arise and where the firm’s accounting records need updating with the new information. Next, we will work through an example of how to prepare a monthly bank reconciliation statement for the month-end process.

Month-End Bank Reconciliation Process

The steps followed to complete bank reconciliation statements can be thought of as coming from two starting points. The first is from the firm’s records, the cash books, and the second is from the bank statements, the bank’s records. The bringing together of these forms your reconciliation statement.

Cash Books

Bank Reconciliation Statement

Bank Statements

For the first part, starting with the cash books, the steps to follow are:

  1. mark-off the transactions that appear in the cash book’s with those same transactions in the bank statements; and
  2. those items left unmarked in the bank statements can now be entered into the cash books. This should be items such as interest earned or paid, bank fees and deposits made by customers we weren’t aware of.

Even though the cash books now have recorded all items that were otherwise on the bank statements, the banks’ records may be missing transactions recorded in the cash books, such as unpresented cheques and cash deposits still being processed. These timing differences will form the items we will use in the reconciliation statement.

Worked Example

Now that we talked about the purpose and theory of bank reconciliation statements, we can now work through an example to illustrate the steps involved and how you might record the process you work through.

Step 1 – Source Documents

So as discussed, the two source documents you will need are the bank statements and cash books. Below we have ABC’s bank statement for June 20xx (it was a quiet month for them), listing all bank transactions for their operating bank account.

Next, we have a copy of their cash book for the same month, June 20XX, setting out their cash transactions as ABC recorded them.

Step 2 – Checking off Bank Statement to Cash Book

We now want to mark off those transactions on the bank statement that we have recorded in the cash book to see if we have missed any transactions put through the account in the month.

I like to mark the bank statement cash books with a tick mark to know what I have covered and what I need to deal with. It’s not important how you keep track of which transactions you have dealt with, for example, using an X, highlighting, crossing out, etc. But I do encourage you to mark the documents. In particular, during tests and exams, it means you don’t overlook anything when the pressure is on.

You can see we have four matching transactions, and we mark these off in their respective sources.

Step 3 – Updating Cash Book

The third step is to update ABC’s cash book with any transactions it has missed during the month that the bank statement has recorded. In this case, there are four transactions that ABC needs to update its records for. I have marked these in blue for effect in the example. One wouldn’t need to worry about the different colours otherwise.

And to ensure completeness in the process, we mark the bank statements for the additions to the cash book. This process shows ABC’s records correctly reflect all transactions for the month.

Step 4 – Preparing the Reconciliation Statements

The final step in the exercise is to prepare the bank reconciliation statements (although we are only doing one in this exercise, as we only have one bank account, most businesses will have multiple statements to prepare). You can see from the final table below the natural order in which the calculations.

First, we have the updated cash book figure, in this case, the closing figure of $9,203.00 brought in from work completed in Step 3. Second, we adjust this figure to reflect any timing differences that have yet to flow into the bank’s records. In our example, we have two.

Unpresented Cheque

The supplier is yet to present to the bank cheque 4568 for $350.00. So this means we add back the amount to the cash book figure. When the supplier presents the cheque, the bank updates its records.

Cash Not Yet Credited

And there is a cash deposit made by ABC on 30 June that the bank has yet to record. This wouldn’t be uncommon, say on the last Friday of the month or just before a holiday at month-end. In this case, we have to deduct the $250.00 from the cash book figure.

After these two adjustments, the new closing bank balance equals the closing balance of the bank statement.

I like to also write in the bank statement figure and have a variance figure. This approach makes it clear I have done the reconciliation correctly. Two reasons for this; first, it is straightforward to do on spreadsheets and gives you a quick check on any changes you have to make. And second, it stops me from reading the number that is there, rather than the one “I think” is there. In the pressure of tests and exams, the mind can play tricks, and this helps to help avoid silly mistakes.

Summary

We hope you have found this exercise in working through bank reconciliation statements helpful and better understand how to perform this essential internal control and the reasons why. If you would like to look further into the theoretical benefits of this process, check out our other article.

Do drop us a note below or get in touch if you have any questions or comments. We also have a question and answer section, a great resource we hope to be developing more in the future.

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