Professional Documents
Culture Documents
reconciliations
Introduction
It is very likely that you will have had to do a bank reconciliation at work. If not,
you will probably have done one on your own bank account without even being
aware of it.
The first two sections of this chapter explain why we need a bank
reconciliation, and the sort of differences that need to be reconciled. The third
section takes you through some examples of increasing complexity.
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Study guide
Intellectual level
E4 Bank reconciliations
(a) Understand the purpose of bank reconciliations 1
(b) Identify the main reasons for differences between the cash book and the
1
bank statement
(c) Correct cash book errors and/or omissions 1
(d) Prepare bank reconciliation statements 1
(e) Derive bank statement and cash book balances from given information 1
(f) Identify the bank balance to be reported in the final accounts 1
Exam guide
Bank reconciliations test your understanding of double entry. You are extremely likely to have a bank
reconciliation question in the exam.
The cash book of a business is the record of how much cash the business believes that it has in the
bank. In the same way, you yourself might keep a private record of how much money you think you have
in your own personal account at your bank, perhaps by making a note in your cheque book of income
received and the cheques you write. If you do keep such a record you will probably agree that when your
bank sends you a bank statement from time to time the amount it shows as being the balance in your
account is rarely exactly the amount that you have calculated for yourself as being your current balance.
Why might your own estimate of your bank balance be different from the amount shown on your bank
statement? There are three common explanations.
(a) Error. Errors in calculation, or recording income and payments, are more likely to have been
made by you than by the bank, but it is conceivable that the bank has made a mistake too.
(b) Bank charges or bank interest. The bank might deduct charges for interest on an overdraft
or for its services, which you are not informed about until you receive the bank statement.
(c) Time differences
(i) There might be some cheques that you have received and paid into the bank, but
which have not yet been 'cleared' and added to your account. So although your own
records show that some cash has been added to your account, it has not yet been
acknowledged by the bank - although it will be in a very short time when the cheque
is eventually cleared.
(ii) Similarly, you might have made some payments by cheque, and reduced the balance
in your account accordingly in the record that you keep, but the person who receives
the cheque might not bank it for a while. Even when it is banked, it takes a day or
two for the banks to process it and for the money to be deducted from your account.
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15: BANK RECONCILIATIONS
If you do keep a personal record of your cash position at the bank, and if you do check your periodic bank
statements against what you think you should have in your account, you are doing exactly the same thing
that the bookkeepers of a business do when they make a bank reconciliation.
Key term A bank reconciliation is a comparison of a bank statement (sent monthly, weekly or even daily by the
bank) with the cash book. Differences between the balance on the bank statement and the balance in the
cash book will be errors or timing differences, and they should be identified and satisfactorily explained.
Question Differences
Answer
Error, bank charges or interest, time differences
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PART E PREPARING A TRIAL BALANCE
Exam focus You are likely to have a bank reconciliation question. You may have to adjust the cash book, the bank
point balance or both.
3 Worked examples
FAST FORWARD
When the differences between the bank statement and the cash book are identified, the cash book must be
corrected for any errors or omissions. Any remaining difference can then be shown to be due to timing
differences.
Solution
(a) £
Cash book balance brought forward 805.15
Add
Correction of undercast 90.00
Corrected balance 895.15
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15: BANK RECONCILIATIONS
(b) £ £
Balance per bank statement 1,112.30
Add
Cheques paid in, recorded in the cash book, but not
yet credited to the account by the bank 208.20
Less
Cheques paid by the company but not yet presented
to the company's bank for settlement 425.35
(217.15)
Balance per cash book 895.15
On 31 January 20X8 a company's cash book showed a credit balance of £150 on its current account
which did not agree with the bank statement balance. In performing the reconciliation the following points
come to light.
£
Not recorded in the cash book
Bank charges 36
Transfer from deposit account to current account 500
Not recorded on the bank statement
Unpresented cheques 116
Outstanding lodgements 630
It was also discovered that the bank had debited the company's account with a cheque for £400 in error.
What was the original balance on the bank statement?
Answer
CASH ACCOUNT
£ £
Balance b/f 150
Transfer from deposit a/c 500 Charges 36
Balance c/f 314
500 500
£
Balance per cash book 314
Add unpresented cheques 116
Less uncleared lodgements (630)
Less error by bank (400)
Balance per bank statement (600)
A company's bank statement shows £715 direct debits and £353 investment income not recorded in the
cash book. The bank statement does not show a customer's cheque for £875 entered in the cash book on
the last day of the accounting period. If the cash book shows a credit balance of £610 what balance
appears on the bank statement?
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PART E PREPARING A TRIAL BALANCE
A £1,847 debit
B £1,847 credit
C £972 credit
D £972 debit
Answer
B
£ £
Balance per cash book (610)
Items on statement, not in cash book
Direct debits (715)
Investment income 353
(362)
Corrected balance per cash book (972)
Item in cash book not on statement:
Customer's cheque (875)
Balance per bank statement (1,847)
Given the facts in the question above, what is the figure for the bank balance to be reported in the final
accounts?
A £1,847 credit
B £972 credit
C £972 debit
D £1,847 debit
Answer
B The figure to go in the balance sheet is the corrected cash book figure. This is £972 credit (or
overdrawn). So the bank figure will appear in liabilities.
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15: BANK RECONCILIATIONS
(f) Dividends received amounting to £200 had been paid direct to the bank and not entered in the cash
book.
(g) A cheque for £50 drawn on deposit account had been shown in the cash book as drawn on current
account.
(h) A cheque issued to Jones for £25 was replaced when out of date. It was entered again in the cash
book, no other entry being made. Both cheques were included in the total of unpresented cheques
shown above.
Required
(a) Indicate the appropriate adjustments in the cash book.
(b) Prepare a statement reconciling the amended balance with that shown in the bank statement.
Solution
(a) The errors to correct are given in notes (c) (e) (f) (g) and (h) of the problem. Bank charges (note
(d)) also call for an adjustment.
CASH BOOK
£ £
20X0 20X0
Jun 30 Bank interest - reversal of Jun 30 Balance brought down 300
incorrect entry (c) 60 Bank charges (d) 35
Bank interest account (c)(Note 1) 60 Correction of undercast (e) 10
Dividends paid direct to bank (f) 200 Balance carried down 50
Cheque drawn on deposit
account written back (g) 50
Cheque issued to Jones
Cancelled (h) (Note 2) 25
395 395
Notes
1 Item (c) is rather complicated. The transfer of interest from the deposit to the current
account was presumably given as an instruction to the bank on or before 30 June 20X0.
Since the correct entry is to debit the current account (and credit the deposit account) the
correction in the cash book should be to debit the current account with 2 × £60 = £120 - ie
to cancel out the incorrect credit entry in the cash book and then to make the correct debit
entry. However, the bank does not record the transfer until 5 July, and so it will not appear
in the bank statement.
2 Item (h). Two cheques have been paid to Jones, but one is now cancelled. Since the cash
book is credited whenever a cheque is paid, it should be debited whenever a cheque is
cancelled. The amount of cheques paid but not yet presented should be reduced by the
amount of the cancelled cheque.
(b) BANK RECONCILIATION STATEMENT AT 30 JUNE 20X0
£ £
Balance per bank statement 65
Add: outstanding lodgements
(ie cheques paid in but not yet credited) (b) 400
deposit interest not yet credited (c) 60
460
525
Less: unpresented cheques (a) 500
less cheque to Jones cancelled (h) (25)
475
Balance per corrected cash book 50
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PART E PREPARING A TRIAL BALANCE
Exam focus Notice that in preparing a bank reconciliation it is good practice to begin with the balance shown by the
point bank statement and end with the balance shown by the cash book. It is this corrected cash book balance
which will appear in the balance sheet as 'cash at bank'. But examination questions sometimes ask for the
reverse order: as always, read the question carefully.
From the information given below relating to PWW Ltd you are required:
(a) To make such additional entries in the cash at bank account of PWW Ltd as you consider
necessary to show the correct balance at 31 October 20X2.
(b) To prepare a statement reconciling the correct balance in the cash at bank account as shown in (a)
above with the balance at 31 October 20X2 that is shown on the bank statement from Z Bank plc.
CASH AT BANK ACCOUNT IN THE LEDGER OF PWW LIMITED
20X2 20X2
October £ October £
1 Balance b/f 274 1 Wages 3,146
8 Q Manufacturing 3,443 1 Petty Cash 55
8 R Cement 1,146 8 Wages 3,106
11 S Limited 638 8 Petty Cash 39
11 T & Sons 512 15 Wages 3,029
11 U & Co 4,174 15 Petty Cash 78
15 V plc 1,426 22 A & Sons 929
15 W Electrical 887 22 B Limited 134
22 X and Associates 1,202 22 C & Company 77
26 Y Limited 2,875 22 D&E 263
26 Z Limited 982 22 F Limited 1,782
29 ABC plc 1,003 22 G Associates 230
29 DEE Corporation 722 22 Wages 3,217
29 GHI Limited 2,461 22 Petty Cash 91
31 Balance c/f 14 25 H & Partners 26
26 J Sons & Co Ltd 868
26 K & Co 107
26 L, M & N 666
28 O Limited 112
29 Wages 3,191
29 Petty Cash 52
29 P & Sons 561
21,759 21,759
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15: BANK RECONCILIATIONS
Answer
(a) CASH BOOK
£ £
31 Oct Dividends received 2,728 31 Oct Unadjusted balance b/f
(overdraft) 14
31 Oct Bank charges 936
31 Oct Adjusted balance c/f 1,778
2,728 2,728
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PART E PREPARING A TRIAL BALANCE
Workings
1 Payments shown on bank statement but not in cash book* £861
£(421 + 73 + 155 + 212)
* Presumably recorded in cash book before 1 October 20X2 but not yet
presented for payment as at 30 September 20X2
2 Payments in the cash book and on the bank statement £20,111
£(3,146 + 55 + 3,106 + 39 + 78 + 3,029 + 3,217 + 91 + 1,782 + 134 + 929
+ 230 + 263 + 77 + 52 + 3,191 + 26 + 666)
3 Payments in the cash book but not on the bank statement = Total £1,648
payments in cash book £21,759 minus £20,111 =
£
(Alternatively J & Sons 868
K & Co 107
O Ltd 112
P & Sons 561
1,648
Chapter Roundup
• In theory, the entries appearing on a business's bank statement should be exactly the same as those in
the business cash book. The balance shown by the bank statement should be the same as the cash book
balance on the same date.
• Differences between the cash book and the bank statement arise for three reasons:
– Errors – usually in the cash book
– Omissions – such as bank charges not posted in the cash book
– Timing differences – such as unpresented cheques
• When the differences between the bank statement and the cash book are identified, the cash book must be
corrected for any errors or omissions. Any remaining difference can then be shown to be due to timing
differences.
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15: BANK RECONCILIATIONS
Quick Quiz
1 Which of the following are common reasons for differences between the cash book and the bank
statements?
(i) Timing differences
(ii) Errors
(iii) Omissions
(iv) Contra entries
A (i) and (ii)
B (i) and (iv)
C (ii), (iii) and (iv)
D (i), (ii) and (iii)
2 A cash book and a bank statement will never agree.
Is this statement?
A True
B False
3 A bank statement shows a balance of £1,200 in credit. An examination of the statement shows a £500
cheque paid in per the cash book but not yet on the bank statement and a £1,250 cheque paid out but not
yet on the statement. In addition the cash book shows deposit interest received of £50 but this is not yet
on the statement. What is the balance per the cash book?
A £1,900 overdrawn
B £500 overdrawn
C £1,900 in hand
D £500 in hand
Now try the questions below from the Exam Question Bank
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PART E PREPARING A TRIAL BALANCE
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