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:

  • DO - Debit Order
  • SO - Stop Order
  • IS - Insurance
  • SF - Service Fees
  • SD - Sundry Debits
  • EC - Error Corrected
  • MT - Magnetic Tape (Not generally used in modern statements)
  • IN - Interest
  • CB - Cheque Book
  • CM - Cheque marked for payment
  • RD - Return to drawer
  • DB - Debit Balance
  • OD - In Overdraft

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 are below[edit]

The following was obtained from the records of ABC Computers of 30 September on statement on 31 August 2009 (Previous month)

£ £
Balance as per bank statement 12200
Outstanding deposit: 2100
Total 14300' \

uncredited cheques:|| No: 100|| 2200||

No: 107 740
No: 109 540 (3480)
Total 10820 (Opening balance for cash book)
Cash Book for September 2009
Date Details Amount (£) Cheque Date Details Amount (£)
3 Sales and VAT 3700 110 3 Water and Electricity
4 A bruce 2400 and VAT 400
10 Deposit 3100 111 4 S Payne 21100
15 Sales and VAT 850 112 9 J Kooste 350
30 Deposit 1670 113 10 Purchases and VAT 2700
114 12 Salaries 4200
115 Donation 500
116 20 Purchases and VAT 3150
118 J Goosen 600
Pencil Total 11720 Pencil Total 33000

Bank Statement for September 2009

Debit Credit Balance
Date £ £ £
1 Balance 12200 Cr
4 Cheque 111 21100 8900 Dr
Deposit 3700 5200 Dr
Deposit 2100 3100 Dr
5 Deposit 2400 700 Dr
SF 60 760 Dr
DO 1400 2160 Dr
10 Cheque 113 2070 4230 Dr
Cheque 110 400 4630 Dr
Deposit 3100 1530 Dr
Cheque 112 350 1880 Dr
Cheque 614 2180 4060 Dr
CB 20 4080 Dr
Cheque 109 540 4620 Cr
SF 100 4720 Dr
12 Cheque 115 500 5220 Dr
15 Deposit 850 4370 Dr
20 Cheque 118 600 4970 Dr
Deposit 4050 920 Dr

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.

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.