Chapter 15

Bank
reconciliations
Overview
Bank reconciliations

Cash book balance Bank statement balance

Differences

Timing differences Errors by the business Errors by the bank

 Bank statement and cash book
Bank reconciliation
• Bank statement is sent by a bank to its customers itemizing:
- The balance on the account at the beginning of the period
- Receipts into the account and payments from the account during the period
- The balance at the end of the period
• The bank general ledger (cash book) is the record of how much cash payment, cash
received and cash balances at any point in time that the business believes that it has in
the bank. (business’s record of their bank account)
• Bank reconciliation is a comparison of a bank statement with the bank general ledger.
• The reconciliation is carried out frequently, usually at monthly intervals.
 Bank statement and cash book

Firms’ view Banks’ view

(Bank general ledger - Cash book) (Bank statement)

Positive balance – Asset - Debit (Dr) balance Positive balance – Liability - Cr balance
Negative balance – Liability - Credit (Cr) balance Negative balance – Asset - Dr balance
(bank overdraft)
 Bank statement and cash book
Common reasons for differences
(1) Timing differences: transactions has been provided for in the bank general ledger but
not in the bank statement
- Unpresented cheques (Outstanding cheques): Cheques paid by the business to
suppliers but they have not yet been presented to the bank and cash have not been
debited from the business’ bank account.
- Outstanding lodgement (uncleared lodgement)/deposit credited after dates: Cheques
received by the business, paid into the bank and debit in the cash book, but which
have not yet been cleared and entered in the account by the bank.
- Electronic payments that have not yet been cleared
=> The differences caused by timing difference need no adjustment in both bank
general ledger and bank statement.
 Bank statement and cash book 2
Common reasons for differences
• (2) Business’ errors and omissions
- Standing orders: an instruction from us given to the bank to pay a fixed amount into an
account every month (eg. installment purchase, hire purchase, rental payment, etc)
- Direct debits: An instruction from us given to the bank to pay a variable amount into an
account every month (eg. Telephone, utilities, etc)
- Dishonored cheques: Cheques that are refused to pay by bank.
- Credit transfers: Money received from customers paying by credit cards or debit cards.
- Dividends receipts from investment: paid directly into the bank account
- Bank charges
- Bank interest: interest charges on overdrawn balance/bank interest on cash balance
=> The differences caused by business’ errors and omissions should be eliminated by
adjusting the bank general ledger .
 Bank statement and cash book 2
Common reasons for differences
• (3) Bank errors => Request the bank to revise and resend the bank statement
Reconciliation process
Bank ledger

Business’ errors
Corrected bank
ledger
Bank reconciliation Timing difference
statement
Corrected bank
statement
Bank’s errors
Bank
statement
 Procedures to perform a bank reconciliation
Performing a bank reconciliation
• Step1: Reconcile opening balance
• Step 2: Tick similar items in cash book and in bank statement
• Step 3: Identify reasons for the difference: company’s errors, bank errors, timing
• Step 4: Update the cash book with items due to the company’s errors
• Step 5: Prepare bank reconciliation statement
 Procedures to perform a bank reconciliation
Performing a bank reconciliation
• Step 4: Update the bank general ledger with items due to the company’s errors
 Procedures to perform a bank reconciliation
Performing a bank reconciliation
Step 5: Prepare bank reconciliation statement
• Bank reconciliation (1)
Balance as per Bank statements (BS) x
Add: Unclear lodgements (BL>BS) x
Less: Unpresented cheques (BL<BS) x
Balance as per Bank general ledger (BL) x
• Bank reconciliation (2)
Bank as per corrected bank general ledger (BL) x
Add: Unpresented cheques (BL < BS) x
Less: Unclear lodgements (BL > BS) x
Balance as per bank statements (BS) x
 Lecture example
Whilst preparing a bank reconciliation statement at 31 December. The following items
caused a difference between the bank statement balance and the bank general ledger
balance.
(1) Bank interest charged to the account in error $100 (bank error, BS < BL)
(2) Direct debit for $500 for insurance (bus error, BS< BL)
(3) Bank charges of $70 (Bus error, BS< BL)
(4) Cheque paid to a supplier on 29 December $800 (timing diff, BS> BL)
(5) Receipt from a trade receivable by electronic transfer $200 (bus error, BS> BL)
Required: Calculate adjusted bank general ledger balance and prepare bank
reconciliation, assume that bank general ledger balance is $1000, and bank balance is
$1330
Lecture example
Bank general ledger
Direct debit

Bus' error Bank charge

Receipt by elec transfer

Corrected BL
Timing diff Unpresented cheques

Corrected bank
Bank's error Interest charged in error

Bank
Lecture example
Lecture example

Cash book
Bus' error Bank charge
Corrected CB
Outstanding lodgement
Timing diff
Unpresented cheque
Corrected bank
Bank's error Cank error_wrongly charge
Bank