||This article duplicates, in whole or part, the scope of other article(s) or section(s), specifically, Reconciliation (accounting).|
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.
Such differences may occur, for example, because a cheque or a list of cheques 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, or 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. 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.
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
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.
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 cheques:||No: 100||2200|
|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|
|15||Sales and VAT||850||112||9||J Kooste||350|
|30||Deposit||1670||113||10||Purchases and VAT||2700|
|116||20||Purchases and VAT||3150|
|Pencil Total||11720||Pencil Total||33000|
Bank Statement for September 2009
- 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)
- ABC Computers signed a debit order for the monthly instalment on their motor vehicle bought from Speedy Car Sales.
- Cheque 614 was not drawn by ABC Computers. (Therefore must be taken out of the bank reconciliation)
- According to the paid cheques, cheque 112 was drawn for £350 and cheque 113 was drawn for £2070.
- A receivable deposited the amount of £4050 owed by him directly into ABC Computers bank account.
- Complete the cash book for September 2009 by starting with the pencil totals.
- Prepare the bank reconciliation statement as at 30 September 2009.
Compare all amounts in the cash book for September 2009 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:
- Reversed numbers i.e. 164 to 614
- Outstanding cheques
- Payments received that have not yet been reflected
- Errors on cheques
- 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|
|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|
Bank reconciliation statement
|Balance as per bank statement||1100|
|Erronerous cheque (614)||2180|
|Error on cheque 112 (£530-£350)||180|
|Credit balance as per cash book||5160|