Bank Reconciliation Statements – Accounting 101

The verification process in double-entry book keeping is critical to ensuring accurate data is compiled; and bank statement statements and their reconciliation to bank records form an important 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 customers account, or charge fees when these have been waved. While 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 main 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 normally arise from the recording of the receipt of physical cash by the firm in its cash books, while the process of depositing this cash with the bank and it being recorded in the bank’s records can take or day or two, in particular around weekends and public holidays.

Unpresented Cheques

While the second type of timing differences arise from cheques which the firm issues to pay for goods and services. When the cheque is issued by the firm it records this in its cash books as a reduction in cash (the credit entry), while the debit depends on the purpose of the transaction. For example the debit would be recorded as expenses if it was used to pay the power account for the month.

It is important to note here 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

Now 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 not aware receipts and / or payments being made 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 will need to be updated with the new information. Next we are going to 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 the reconciliation 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 statements may be missing transactions recorded in the cash books such as unpresented cheques and deposits of cash still be 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 are going to 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.

ABC’s Bank Account Statement For The Month of June 20XX

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

ABC’s Cash Book For The Month of June 20XX

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 then 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 marking the documents. In particular during tests and exams it means nothing gets look over when the pressure is on.

You can see we have four matching transactions and these are marked-off in their respective sources.

Step 3 – Updating Cash Book

The third step is to update ABC’s cash book with any transactions that 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 affect in the example, one wouldn’t need to worry about the difference colors otherwise.

And to ensure completeness in the process the bank statement transactions are marked-up with the additions added to the cash book – showing that all transactions have now been brought into ABC’s records.

Step 4 – Preparing the Bank Reconciliation Statement

The final step in the exercise is to prepare the bank reconciliation statement itself. You can see from the final table below the natural order in which the calculation is made.

First we have the updated cash book figure, in this case the closing figure of $9,203.00 brought in from the 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

Cheque 4568 for $350.00 has yet to be presented by the supplier and so this amount is added back to the cash book figure as the bank is yet to record the cheque being presented.

Cash Not Yet Credited

And there is a cash deposit made by ABC on 30 June that the bank has yet to update its records for, not 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 we have a new “adjusted for” closing bank balance and this should equal the closing balance of the bank statement.

I like to also write in the bank statement figure and to have a variance figure to ensure I have done the reconciliation correctly. Two reasons for this; first on spreadsheets it is very easy to do and gives you a very quick check on any changes you have to make. And second it stops me reading the number that is actually there, rather than the one “I think” is there. In the pressure of test and exams the mind can play tricks and anything to help avoid silly mistakes is always a plus.

Summary

We hope you have found this exercise in working through a bank reconciliation statement helpful and have a better understanding not only of how to perform this important internal control but also the reasons before it. If you would like to look further into the theoretical benefits of this process checkout our other article looking at this.

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

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