Bank reconciliation Revision Notes

A bank statement is a document issued by a bank that lists all transactions affecting a bank account over a specific period, usually monthly. It includes deposits, withdrawals, bank charges, interest payments, and any other transactions processed by the bank.

The bank statement is essential because it provides an independent record of all transactions affecting the account. It helps the account holder verify that their own records (the cash book) are accurate and complete.

For example, if a business deposits cash and issues cheques, the bank statement will show when these transactions were processed by the bank, which may differ from the dates recorded in the cash book. This difference can cause discrepancies that need to be resolved.

• Shows all bank account transactions over a period.
• Acts as an independent record for verification.
• Helps identify timing differences and errors.

The cash book is the business’s own record of cash and bank transactions. However, it may not initially reflect all transactions shown on the bank statement. Adjustments are necessary to ensure the cash book matches the true bank balance.

Common adjustments include: bank fees (charges deducted by the bank), interest received (credited by the bank), interest paid (charged by the bank), error corrections (mistakes in recording transactions), credit transfers (money received directly into the account), direct debits (payments authorised to be taken automatically), dividends received, and standing orders (regular fixed payments).

For example, if the bank charges a monthly fee of $15 which the business has not recorded, the cash book must be adjusted by deducting $15 to reflect this expense. Similarly, if the bank pays interest of $20 into the account, the cash book should be increased by $20.

• Bank fees reduce the cash book balance.
• Interest received increases the cash book balance.
• Interest paid decreases the cash book balance.
• Errors in the cash book must be corrected to match actual transactions.
• Credit transfers and direct debits affect the cash book balance and must be recorded.
• Dividends and standing orders require appropriate adjustments.

A bank reconciliation statement is prepared to explain the difference between the balance shown in the cash book and the balance shown on the bank statement at a given date.

Differences arise because of timing delays (such as cheques issued but not yet presented), bank errors, or transactions recorded in one record but not the other.

The reconciliation statement helps identify these differences and ensures that the cash book and bank statement are consistent, providing confidence in the accuracy of the business’s financial records.

• Explains differences between cash book and bank statement balances.
• Identifies timing differences and errors.
• Ensures accuracy of financial records.

To prepare a bank reconciliation statement, start with the balance shown in the cash book (after adjustments). Then add deposits recorded in the cash book but not yet credited by the bank (deposits not yet credited). Next, subtract cheques issued and recorded in the cash book but not yet presented to the bank (unpresented cheques). Finally, adjust for any bank errors or omissions.

For example, if the cash book balance is $5,000, there are deposits of $500 not yet credited by the bank, and cheques of $700 not yet presented, the reconciliation statement would adjust the bank statement balance accordingly to match the cash book.

The statement format is typically: Starting with the bank statement balance, add deposits not yet credited, subtract unpresented cheques, and adjust for errors to arrive at the adjusted bank balance, which should equal the adjusted cash book balance.

• Start with cash book balance after adjustments.
• Add deposits not yet credited by the bank.
• Subtract unpresented cheques.
• Adjust for bank errors.
• Ensure adjusted balances agree.