Chapter 8

Because of timing differences with cheques being received or payments being made that haven't cleared; it can lead to there being differences between the main cash book and the bank statement. The Bank Reconciliation statement provides reconciliation between the balance of the main cash book and the bank statement.

Unpresented cheques: A payment that has been recorded in the cash book but has NOT yet cleared the bank account.

Outstanding lodgement: An amount recieved that has been recorded in the cash book but has NOT yet cleared the bank account. Think of a lodger - they pay you.

Step 1

-> Check whether the opening balance of the main cash book is the same as the opening balance in the bank statement.

• If it is not the same: make a note of the difference
• If it is the same; tick the opening balances in both the main cash book and the bank statement.

 Step 2

-> Compare the main cash book transactions to the transactions shown on the bank statement. Tick the transactions that appear in both the cash book and the bank statement.

Note: transactions that are recorded in the main cash book as debits are shown on the bank statement as debits as it is written from the banks point of view.

Step 3

Look at the transactions that have not been ticked on the bank statement. These items need to be added to the main cash book. (unless the bank has made an error- see later)

Update the main cash book woth these items, taking care to ensure the tranaction has been entered into the correct side of the main cash book.

Balance the main cash book. 

Step 4

The remaining items that have not been ticked in the main cash book are items that have not yet cleared into the bank account therefore they don't appear on the bank statement. These are items due to timing differences and form part of the bank reconciliation statement.

These items need to be put as either an outstanding lodgement or an unpresented cheque.

Tip: In the main cash book; items that are left on the Right side are unpResented cheques.

Step 5

The bank reconciliation can nopw be prepared. Format::

Bank balance as per the cash book                   x    Note:This is the balance b/f after changes
Add: Unpresented cheques                               x
Less: Outstanding Lodgements                         x
                                                                     ----
= Bank balance as per the bank statement        x    Check: compare this to the closing
                                                                            balance on the bank statement.

If the opening balance on the bank statement is not the same as the opening balance of the cash book it is because of  an unpresented cheque or outstanding lodgement from the end of the previous month. All you need to do:

• Note down both the opening balances and calculate the difference between the two.
   
• Look on the bank statement for one or more transactions that add up to this amount.
   
• Then tick these two transactions as well as the opening balances in the cash book and bank statement.

The bank may make an error and record transactions in the business's bank account that should not be there.Examples of these errors are:

• A cheque has been deducted from the business's bank account that was not written from the business. This can be identified as a cheque number that is out of sequence.
• A receipt of a BACS transaction in error
• Standing orders and Direct Debits for the wrong date or amount.

The error should be queried with the bank immediately. The cash book should not be updated with the item until the issue has been resolved with the bank. If this happens, the error should be shown separately in the reconciliation statement.

If an bank error has been found, the format of the reconciliation statement is amended as follows:

Balance as per the cash book                                                            x
Add: unpresented cheques                                                x
Add: errors relating to the amounts paid in the bank     x
                                                                                      ---
                                                                                                       x
Less: Outstanding lodgements                                         (x)
Less: errors relating to amounts paid out of the bank   (x)
                                                                                     ----
                                                                                                      (x)
                                                                                                     -----
Balance as per the bank statement                                                    x 

• Transactions in the bank and cash columns are recorded with those on the bank statement. In this way, any errors in the cash book/ bank statement will be found and corrected
  
  
• The bank statement is an independant accounting record, therefore it will asssit in deterring fraud by verifying the cash book balance.
  
  
• By writing the cash book up to date, the organisation has an amended figure for the bank balance to be shoen in the trial balance. 
  
  
• Unpresented cheques over 6 months old - out of date cheques- can be identified and written back in the cash book as outdated cheques won't be paid in the bank account.
  
  
• The reconciliation statement should be prepared as quickly as possible so any queries; either with the bank statement or cash book, can be resolved.