Bank reconciliation

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 organisation's own accounting records at a particular point in time.

Such differences may occur, for example, because

• a cheque issued by the organisation 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
• either the bank or the organisation 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.

If not, 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.

Abbreviations

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

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

Question

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 statement			12200
Outstanding deposit:			2100
Total			14300
Outstanding cheques:	No: 100	2200
	No: 106	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 Jones	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	530		2060	Dr
	Cheque 614	2180		4240	Dr
	CB	20		4260	Dr
	Cheque 109	540		4800	Dr
	SF	100		4900	Dr
12	Cheque 115	500		5400	Dr
15	Deposit		850	4550	Dr
20	Cheque 118	600		5150	Dr
	Deposit		4050	1100	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.

Solution

Compare all amounts in the cash book for September 20.9 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 Computers	Dr		Cr
Balance b/f	10820
Pencil total	11720	Pencil total	33000
Payable (Cheque 100)	2200	Speedy Car Sales	1400
Purchases and VAT (Cheque 113)	630	Bank Charges and VAT (60+20+100)	180
Receivable	4050
Balance c/f	5160
	34580		34580
		Balance b/f	5160

Bank reconciliation statement

Bank reconciliation	Debit	Credit
Balance as per bank statement	1100
Erronerous cheque (614)		2180
Error on cheque 112 (£530-£350)		180
Outstanding deposit		1670
Outstanding cheques:
Cheque 114	4200
Cheque 116	3150
Cheque 106	740
Credit balance as per cash book		5160
	9190	9190