Bank Reconciliation

This post has been produced by B J Harford FCCA, FIAB, Principal at Woodgrove Tutorials.

Woodgrove

Woodgrove Tutorials is an IAB Accredited Training  Provider. Their  Principal, Brian J Harford FCCA is an Award Winning qualified Accountant with 36 years teaching experience in Bookkeeping & Accounts including 17 years as a Part Time Lecturer at the London Metropolitan University (formerly Guildhall University)

For website see: www.woodgrove-tutorials.co.uk.

Every Asset A Business owns and lists in its Balance Sheet must be verified. Cash at bank will show as a current asset in the Balance Sheet and the amount shown as a current asset is reconciled to an external document namely the Bank Statement.

In practice, a business would have to segregate cash and cheque transactions. This can be achieved by the operation of a two column Cash Account. This account will have debit and credit columns for cash entries together with debit and credit columns for cheque transactions. An example of a two column Cash Account is as follows: –

CASH ACCOUNT

Date

Details

Cash

Bank

Date

Details

Cheque No.

Cash

Bank

£

£

£

£

Mar 1 Balance b/d

500

1,000

Mar 2 Purchases

111

200

Mar 7

2,100

Mar 3 Telephone

112

100

Mar 9

200

Mar 5 Rent

113

300

Mar 11

1,900

Mar 7 Travel

40

Mar 12

100

1,800

Mar 9 P Winters

114

600

Mar 27

200

Mar 11 Entertainment

50

Mar 30

2,100

Mar 12 Postage

20

Mar 31

600

Mar 15 Rates

115

150

Mar 17 Advertising

116

150

Mar 19 Wages

117

40

100

Mar 20 Light & heat

118

160

Mar 21 A. Jones

119

300

Mar 24 P. Allman

120

290

Mar 26 Purchases

121

110

Mar 27 Postage

50

Mar 27 Bank

200

Mar 29 Cleaning

50

Mar 30 P Sayers

122

720

Mar 31 Purchases

123

480

Mar 31 Balance c/d

350

6,040

800

9,700

800

9,700

April 1 Balance b/d

350

6,040

At the end of March the Cash in Hand is £350 whilst the balance at Bank is £6,040. Note that on 27 March some of the cash (£200) was paid into the Bank. This is recorded by crediting the Cash column (as Cash is being depleted) and debiting the Bank column (as Bank is receiving). This transfer from Cash to Bank does not increase or decrease the overall resources but is merely a transfer from ‘’one pocket to the other’’. This type of transfer is called a contra entry.

Reconciling the balance of the Bank column of the Cash Account to the bank statement:-

At the end of March the balance of Cash at Bank according to the Cash Account was £6,040. However it will be virtually certain that when the Bank sends the statement for 31 March it will show a balance which is different to that shown in the Bank column of the Cash Account. There are three main reasons for this and they are:-

1.  Outstanding cheques

Sometimes called unpresented cheques, these are cheques which have been drawn, entered in the Bank column of the Cash Account, but have not been presented for payment at the Bank. Consider cheque numbers 120 to 123 in the Cash Account shown. These cheques were drawn during the period 24 – 31 March. It is therefore most unlikely that these cheques would appear on the Bank Statement at 31 March. These cheques have of course been entered in the Cash Account so in the Bank Reconciliation statement they must be deducted from the Bank Statement balance.

2.  Outstanding lodgements

These are monies which have been received, banked, and entered in the Cash Account. However, there will be a delay of at least one day before the amounts banked appear on the Bank Statement. Amounts banked towards the end of March will not appear on the Bank Statement until 1 April. Therefore, a adjustment must be made for amounts entered in the Cash Account but which do not appear on the Bank Statement.

3. Items on the Bank Statement but not in the Cash Account

Examples of items which fall into this category are:-

a)  Bank charges

These are calculated by the Bank at regular intervals who then debit the customer’s Bank Statement. The first notification that the customer receives is when the charges appear on the bank statement.

Bank charges are an expense which the business has paid. Therefore they must be entered as such in the Cash Account. This entry brings the Cash Account into line with the Bank Statement.

b)  Standing order or direct debit payments

These are instructions given to the Bank authorising them to make regular payments. The authorisation is given by the customer signing a standing order or debit mandate. The authorised payments will automatically be made by the Bank on the due date. Therefore, the amounts paid must be entered in the Cash Account to bring it in to line with the Bank Statement.

c)  Standing order or direct debit receipts

These are amounts received by the Bank on behalf of its customer. A person who owes money to a business may authorise their bank to make a direct payment to the bank account of the business to which the amount is due.  These amounts are receipts in the Cash Account and must be entered as such, bringing the Cash Account into line with the Bank Statement.

Reconciling the balance of the bank column of the cash account to the bank statement:-

The format and presentation of the reconciliation will be as follows :

£

£

Balance per bank statement dated 31 March

4,470

Less: Outstanding cheques:
Cheque number 116

150

Cheque number 117

100

Cheque number 120

290

Cheque number 121

110

Cheque number 123

480

1,130

Add outstanding lodgements :
March 30

2,100

March 31

600

2,700

Balance per cash book at 31 March

6,040

Notes:-

a)  The above assumes that cheque numbers 116,117,120,121 and 123 had not been presented for payment, ie did not appear on the Bank Statement at 31 March.

b)  The above assumes that the amounts of £2,100 and £600 banked on 30 and 31 March had not been credited by the Bank on the statement to 31 March.

c)  The proof of the reconciliation (and the verification of the Cash Account balance) lies in the fact that, when the Bank Statement balance is adjusted for outstanding cheques and outstanding lodgements, it agrees with the balance on the Cash Account ie £6,040.

Adjusting the Cash Account prior to attempting the bank reconciliation :-

Before the bank reconciliation is attempted any items which appear on the Bank Statement but not in the Cash Account must be entered in the Cash Account.

Examples of such items are:-

  • Standing order or direct debit payments
  • Standing order or direct debit receipts
  • Bank charges
  • Bank interest receivable
  • Bank interest payable

Example:-

The Cash of a business appeared as follows :-

CASH ACCOUNT

Date

Details

Cash

Bank

Date

Details

Cheque No.

Cash

Bank

£

£

£

£

Mar 1 Balance b/d

400

1,500

Mar 2 Purchases

101

100

Mar 7 Sales

3,100

Mar 3 Telephone

102

250

Mar 9 Sales

150

Mar 5 Rent

103

350

Mar 11 Loan

1,800

Mar 7 Travel

60

Mar 12 Sales

100

1,800

Mar 9 P West

104

550

Mar 27 Cash

250

Mar 11 Entertainment

70

Mar 30 Sales

2,200

Mar 12 Postage

10

Mar 31 Sales

700

Mar 15 Rates

105

200

Mar 17 Advertising

106

150

Mar 19 Wages

107

40

140

Mar 20 Light & heat

108

260

Mar 21 A. Johnson

109

350

Mar 24 P. Allmost

110

240

Mar 26 Purchases

111

130

Mar 27 Postage

65

Mar 27 Bank

250

Mar 29 Cleaning

55

Mar 30 P Smith

112

600

Mar 31 Purchases

113

400

Mar 31 Balance c/d

100

7,630

650

11,350

650

11,350

April 1 Balance b/d

350

7,630

On 31 March a Bank Statement is received which appears as follows:

B A N K    S T A T E M E N T

County Bank Ltd

128 East Lane

Anytown

Date

Details

Cheque number

Debit

Credit

Balance

£

£

£

Mar 1

Balance

1,500

Mar 7

Insurance SO

250

1,250

Mar 8

Banking

3,100

4,350

Mar 8

101

100

4,250

Mar 8

102

250

4,000

Mar 10

103

350

3,650

Mar 12

Banking

1,800

5,450

Mar 13

Banking

1,800

7,250

Mar 18

105

200

7,050

Mar 22

107

140

6,910

Mar 26

109

350

6,560

Mar 29

111

130

6,430

Mar 31

Banking

250

6,680

Mar 31

Bank charges

250

6,430

Mar 31

SO from A Trader

450

6,880

Note:

In the books of the Bank, receipts are shown as credits whilst payments are shown as debits.

Before the bank reconciliation can be attempted the Cash Account must be fully written up to include the following:

Date

Details

Receipt

Payment

£

£

March 7

Insurance SO

250

March 31

Bank charges

250

March 31

SO from A Trader

450

When these items are entered in the Cash Account it will appear as follows:-

CASH ACCOUNT

Date

Details

Cash

Bank

Date

Details

Cheque No.

Cash

Bank

£

£

£

£

Mar 1 Balance b/d

400

1,500

Mar 2 Purchases

101

100

Mar 7 Sales

3,100

Mar 3 Telephone

102

250

Mar 9 Sales

150

Mar 5 Rent

103

350

Mar 11 Loan

1,800

Mar 7 Travel

60

Mar 12 Sales

100

1,800

Mar 9 P West

104

550

Mar 27 Cash

   250

Mar 11 Entertainment

70

Mar 30 Sales

2,200

Mar 12 Postage

10

Mar 31 Sales

  700

Mar 15 Rates

105

200

Mar 31 A Trader SO        450 Mar 17 Advertising

106

150

Mar 19 Wages

107

40

140

Mar 20 Light & heat

108

260

Mar 21 A. Johnson

109

350

Mar 24 P. Allmost

110

240

Mar 26 Purchases

111

130

Mar 27 Postage

65

Mar 27 Bank

250

Mar 29 Cleaning

55

Mar 30 P Smith

112

600

Mar 31 Purchases

113

400

Mar 7

Mar 31

Mar 31

Insurance SO

Bank charges

Balance c/d

100

250

250

7,580

650

11,800

650

11,800

April 1 Balance b/d

100

7,580

The bank reconciliation will appear as follows:-

£

£

Balance per bank statement dated 31 March

6,880

Less outstanding cheques:
Cheque No 104

    550

Cheque No 106

   150

Cheque No 108

   260

Cheque No 110

   240

Cheque No 112

   600

Cheque No 113

   400

2,200

Add outstanding lodgements:
March 30

2,200

March 31

   700

     2,900
Balance per cash book at 31 March

7,580

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