bank reconciliation a statement drawn up by the business to make sure that each of the bank

balances shown in the statement of financial position are correct. This is one of the most
fundamentally important financial controls for any business, as it ensures the accuracy and
completeness of all transactions that have passed through the bank.

Unit 1: The purpose of bank reconciliations

It is important that the bank balance reported in the final accounts is accurate and reflects the amount
of cash that the bank holds on behalf of the business. The business records the cash received and cash
payments in the books of prime entry and these are posted to the bank ledger account in the general
ledger.

The bank keeps records of transactions in and out of the business's bank account and sends the
business these records regularly (usually monthly) in the form of a bank statement. The balance on
the bank statement received from the bank is often different to the bank ledger account balance in
the general ledger. It is important that the final accounts reflect the correct amount of cash available
to the business, so the bank reconciliation is prepared to show what these differences are and what
the correct balance should be.

A bank reconciliation is therefore a reconciliation between a bank statement and the balance on the
bank ledger account.

But why do we prepare a bank reconciliation?

To help you to think about why we prepare bank reconciliations, try answering the questions in the
following activity.

In this activity, select one of the possible answers given, and then click 'Check answer' to see if you are
correct.

All businesses should perform bank reconciliations on a regular basis, as the activity above explains.
Preparing a bank reconciliation regularly is good practice, but the most important reason to do so is
to make sure that the bank balance in the final accounts is accurate.

Let's move on to consider why the bank statement and bank ledger balance may not agree.
Can a bank reconciliation identify errors and omissions in the cash books of prime entry?

yes

When we find errors and omissions we amend the cash books of prime entry to correct the errors and
omissions.

Unit 2: Errors, omissions and timing differences

Now we have considered why we do bank reconciliations, let's look at some reasons why the bank
statement balance may not agree with the balance on the bank ledger account. These differences may
arise from errors, omissions or simply timing differences.

An error or omission suggests that the bank ledger and/or the bank statement may be incorrect. An
example would be where the bank has deducted bank charges for administration of the business
account from the balance on the statement, but the business has forgotten to include this expense in
its general ledger.

A timing difference arises when receipts and payments are recorded in the bank ledger but have not
been shown on the bank statement at the relevant date. There are two types of timing difference that
you may come across:

Unpresented cheques

Outstanding lodgements

These are described in the activity below, along with some other types of errors and omissions you
may find.

Useful advice

Journals will be used for correcting the errors and recording the omissions in the bank ledger account.
Unpresented cheque

A cheque sent by the business to a supplier but not yet recorded on the bank statement

Outstanding lodgement

A receipt paid into the bank by the business but not yet recorded on the bank statement

Bank error/omission

An incorrect or missing entry on the bank statement

Cash book error/omission

An incorrect or missing entry in the cash book

Dishonoured cheque

A cheque received from a customer in settlement of an amount owing that has not been honoured by
the customer's bank. Dishonoured cheques are also called 'bounced' cheques.

Direct debit/standing order/BACS

A transaction made directly to the bank that may not be recorded in the cash book

Prepare the reconciliation between the bank statement and the corrected bank ledger

Nandita received a statement from her bank that showed she held $1,200 in her business current
account. She reconciled the statement to her ledger and noticed that the bank had deducted $60 for
charges in error. In addition, there were unpresented cheques totalling $1,500 and outstanding
lodgements of $750.
What is the correct bank balance to be reported in the final accounts?

A: $510 debit

B: $990 credit

C: $1,110 credit

D: $390 debit

In this unit we looked at the types of differences that arise in a bank reconciliation. The next unit will
explain how correcting adjustments are made and the format of the bank reconciliation.

George has received the bank statement for Sunrise Lighting showing a balance held by the
bank of $23,325 at 30 June 20X2. This is after the bank has deducted:

a direct debit of $2,300

a dishonoured cheque for $895.

Neither of these deductions by the bank has been recorded in the bank ledger account.

Let's see what the bank ledger account will look like after these two transactions have been
recorded and then look at the bank reconciliation itself.

Bank ledger account

DR CR
Date Narrative $ Date Narrative $
30 June Balance b/d 17,970 30 June Direct debit 2,300
30 June Dishonoured cheque 895
30 June Revised balance c/d 14,775
 Bank ledger account
DR CR
17,970 17,970
Bank reconciliation $
Balance per bank statement 23,325
Less: unpresented cheques (20,110)
Plus: outstanding lodgements 10,935
Plus: bank deducted charges in error 625
Balance per bank ledger account 14,775

Example 2

Sunrise Lighting receives a bank statement at 30 September 20X2 showing that the balance at the
bank is $16,896. George notices that this is after a deduction for bank charges of $256. Also a cheque
for $345 that he paid in last week from one of his customers has been dishonoured and there is a
standing order for $2,100. None of these transactions have been recorded in the bank ledger account.

The bank ledger account on 30 September 20X2 shows a balance of $22,458. George notices that there
are cheques that have not been presented for payment amounting to $12,980 and receipts of $15,841
banked that have not been identified on the bank statement.

Remember the following technique:

Find the balance on the bank ledger account and the bank statement

Identify the errors, omissions and timing differences

Correct the bank reconciliation or bank ledger account depending on which one is wrong.

In practice it would be your job as an accountant to find the errors, omissions and differences.