0452 · 3.3Bank reconciliation

Bank records and reconciliation purpose

0:00Nadia’s Florist has recorded money received and payments made, but the bank reports a different balance. Both records can contain correct entries and still disagree on the same date. This video covers the use and purpose of a bank statement and how to update the cash book. It then shows the purpose and preparation of a bank reconciliation statement. Finally, it explains the impact of digital business transactions on the bank reconciliation process.

0:24The cash book records receipts and payments of cash and of money through the bank. Its bank columns are the business’s own record of its bank account. Receipts go on the debit side, while payments belong on the credit side. A debit balance means money is available in the bank account. A bank statement is a document issued by a bank showing transactions and the balance on a customer's account.

0:45It is the bank’s record of the business’s account, and the business receives it regularly. The owner can compare it with the cash book to check entries and identify differences. Its balance must be read from the bank’s viewpoint. A credit balance on the statement represents money the business has in the bank. The bank owes that money to its customer. Meanwhile, the business records the available money as a debit balance in its cash book.

1:08These opposite labels describe the same position from different viewpoints. Bank reconciliation is the process of comparing the cash book with the bank statement and explaining differences. It checks the accuracy of both records and helps identify errors or possible fraud. It also establishes the correct recorded bank balance for financial statements. Financial statements are summaries that show a business’s profit or loss for a period and what it owns and owes at a date.

1:33Assets are resources owned by the business, while liabilities are amounts it owes to others. The statement of financial position shows assets, liabilities and owner’s equity at a particular date. Its bank figure comes from the updated cash book. However, agreement between the records does not guarantee that every transaction is genuine. An unfamiliar payment still needs investigation, even if it appears in both places.

Identifying timing differences

1:57Some differences arise because the bank knows about a transaction before the business records it. Bank charges and interest can appear on the statement first. Other differences arise because the business has recorded a transaction that the bank has not processed. Errors can also occur in either record, so we must identify which record needs correction. Compare entries individually rather than looking only at the final balances. Match each amount with its description and date, then mark the matching entries.

2:24Investigate anything left unmatched, including transactions carried forward from an earlier reconciliation. A difference in the totals alone does not reveal its cause. An uncredited deposit is money paid into the bank and recorded in the cash book but not yet credited by the bank. The business has already recorded the receipt correctly. Therefore, there is no new cash book entry to make. The difference remains until the bank processes the deposit.

2:50An unpresented cheque is a cheque issued and recorded in the cash book but not yet paid by the bank. The business has already recorded the payment. Its cash book balance is therefore lower than it would be without that payment. Until the cheque is presented and processed, the bank statement has not deducted it. These are timing differences, not missing business transactions. Recording either item again would count the same receipt or payment twice.

3:14The cash book remains unchanged for them. Instead, a separate statement explains why the bank’s figure has not yet caught up.

Updating the cash book

3:20Bank charges are amounts charged by the bank for its services. Bank interest paid is the cost of borrowing from the bank, while bank interest received is income earned on money deposited. Missing charges and interest paid reduce the cash book balance. Interest received increases it when the business has not already recorded the receipt. Expenses are the costs used up in running the business and earning revenue during a period.

3:43For bank charges, debit the bank charges account because a service cost has arisen, and credit bank because available money falls. Interest paid requires a debit to the bank interest paid account and a credit to bank. Here, borrowing has created a cost and reduced the available funds. For interest received, debit bank because available money rises, and credit bank interest received because income has been earned. Double entry means every transaction is recorded as a debit in one account and a credit of the same amount in another.

4:13Updating the bank columns therefore also affects the relevant other accounts. The reconciliation statement itself does not create double entries. A credit transfer is money transferred directly from one bank account to another. A customer may pay Nadia electronically before she records the receipt. Trade receivables are amounts owed by credit customers who have not yet paid for goods or services. For this collection, debit bank because available money rises, and credit trade receivables because the customer’s outstanding debt falls.

4:42Nadia pays for electricity through a direct debit. This instruction authorises a recipient to collect money from the payer’s account, with amounts that may vary. For each electricity payment, debit electricity expense because power has been used, and credit bank because available funds fall. The statement may reveal a payment Nadia has not entered. Only that missing entry needs recording. Rent is a fixed amount, so Nadia might pay it by standing order.

5:08Under a standing order, the bank pays a fixed amount regularly to a named recipient. Debit rent expense because the premises have been used, and credit bank because the payment reduces available money. Although the instruction is regular, Nadia must still check that each payment appears in her records. Correction of errors follows the same principle of fixing the record that is wrong. Suppose an insurance payment was recorded below its actual amount.

5:32The correction debits insurance expense because the recorded cost needs to rise, and credits bank because the original deduction was insufficient. A bank error, however, belongs in the reconciliation and should be reported to the bank. Sometimes the statement shows a dishonoured cheque, which is a cheque that the bank refuses to pay. If a customer’s cheque was previously recorded as received, its cancellation reduces the bank balance. Debit trade receivables because the customer still owes the money, and credit bank because the expected receipt is removed.

6:01This adjustment belongs in the cash book when it has not already been entered.

Worked cash book update

6:06At Nadia’s Florist, the cash book has a debit balance of four thousand dollars on the thirtieth of June. Assume this is the balance before the missing entries and correction. Her statement shows a customer’s credit transfer of nine hundred dollars and interest received of one hundred dollars. Both are receipts that must be added. Four thousand dollars plus nine hundred dollars gives four thousand nine hundred dollars. Adding the interest of one hundred dollars brings the balance to five thousand dollars.

6:31The total missing receipts are nine hundred dollars plus one hundred dollars. That is one thousand dollars added to the cash book. The statement also shows bank charges of two hundred dollars and interest paid of one hundred dollars. A direct debit paid three hundred dollars for electricity, and a standing order paid four hundred dollars for rent. None of these payments appears in the cash book. Each must therefore reduce its bank balance.

6:53Five thousand dollars minus two hundred dollars leaves four thousand eight hundred dollars. Deducting one hundred dollars gives four thousand seven hundred dollars. The electricity payment of three hundred dollars reduces this to four thousand four hundred dollars. Subtracting the rent payment of four hundred dollars leaves four thousand dollars. Nadia also recorded an insurance payment as two hundred dollars, although the correct payment was four hundred dollars. Four hundred dollars minus two hundred dollars gives an additional deduction of two hundred dollars.

7:25Subtract that correction from four thousand dollars. The updated cash book has a debit balance of three thousand eight hundred dollars. Two hundred plus one hundred plus three hundred plus four hundred plus two hundred makes twelve hundred dollars of deductions. Four thousand dollars plus one thousand dollars minus twelve hundred dollars equals three thousand eight hundred dollars. That calculation includes missing receipts, missing payments and the business’s error correction.

7:51In the bank columns of the cash book, the debit side holds the opening balance of four thousand dollars. The credit transfer of nine hundred dollars and the interest received of one hundred dollars join it there. On the credit side are bank charges, interest paid, electricity, rent and the insurance correction. Each details entry names the other account. The balance carried down is three thousand eight hundred dollars, dated the thirtieth of June.

8:15On the credit side, twelve hundred dollars of deductions plus the balance of three thousand eight hundred makes five thousand dollars. The debit side matches it, since four thousand plus nine hundred plus one hundred is also five thousand dollars. On the first of July, the balance brought down is a debit of three thousand eight hundred dollars.

Preparing reconciliation statements

8:33A bank reconciliation statement explains differences between the updated cash book balance and the bank statement balance at a particular date. It is a calculation, not another account. Begin with one balance and adjust only the remaining differences. For Nadia, we will start with the balance on the bank statement. Her statement shows a credit balance of three thousand four hundred dollars. An uncredited deposit is eight hundred dollars, and unpresented cheques total six hundred dollars.

8:59The bank also wrongly deducted another customer’s payment of two hundred dollars from Nadia’s account. These items explain the remaining difference without creating new cash book entries. Add the deposit because the cash book includes money that the bank statement does not yet show. Three thousand four hundred dollars plus eight hundred dollars gives four thousand two hundred dollars. Deduct the cheques because the cash book includes payments that the bank has not yet deducted.

9:23Four thousand two hundred dollars minus six hundred dollars gives three thousand six hundred dollars. The bank’s incorrect deduction made its balance too low, so add back two hundred dollars. Three thousand six hundred dollars plus two hundred dollars gives three thousand eight hundred dollars. The adjusted statement balance equals three thousand eight hundred dollars, and the updated cash book balance equals three thousand eight hundred dollars. The two records now agree after their differences are explained.

9:51A bank error needs a direction based on its effect, rather than an automatic addition. An incorrect deduction is added back when starting from the statement. An incorrect credit would be deducted because it made the statement balance too high. Nadia should contact the bank about its error rather than alter her correct business records. Working the other way reverses each adjustment. Three thousand eight hundred dollars minus eight hundred dollars gives three thousand dollars.

10:17Adding six hundred dollars produces three thousand six hundred dollars. Deducting two hundred dollars gives the statement’s credit balance of three thousand four hundred dollars. A bank overdraft is an amount owed to the bank, so it is a liability. It arises when payments exceed available funds. The overdraft appears as a credit balance in the cash book and a debit balance on the statement. In reconciliation calculations, treat an overdraft as a negative amount.

10:42Receipts move the position towards zero, while payments make the amount owed larger. For a separate month at Nadia’s Florist, prepare a reconciliation from a bank statement overdraft of sixteen hundred dollars. An uncredited deposit is seven hundred dollars, and unpresented cheques total five hundred dollars. Prepare means present information in a suitable format. Start with the negative statement balance and apply the same timing adjustments as before. Negative sixteen hundred dollars plus seven hundred dollars equals negative nine hundred dollars.

11:12Deducting five hundred dollars gives negative fourteen hundred dollars. The updated cash book therefore shows a credit balance of fourteen hundred dollars, which is an overdraft. The signs show that the deposit reduces the amount owed, while the outstanding cheques increase it.

Exam technique and digital transactions

11:27Paper One contains forty multiple-choice questions, while Paper Two contains five compulsory structured questions. Questions may require calculations, cash book updates, reconciliation statements or explanations. Calculate means work out from given figures. Explain means give reasons, why and how, supported by evidence. Consider an explanation of why unpresented cheques do not require another cash book entry. They have already been recorded as payments by the business. The bank has not yet processed them, so the difference is caused by timing.

11:57Recording them again would duplicate the payments and understate the cash book balance. Common examination mistakes come from mixing the two stages or confusing the viewpoints. Update the cash book for missing transactions and its own errors before preparing the reconciliation. Keep uncredited deposits, unpresented cheques and bank errors in the reconciliation statement. Read debit and credit balances according to the record in which they appear. Digital business transactions can make reconciliation faster because online banking often displays transactions almost immediately.

12:29Fewer cheque payments can reduce differences caused by unpresented cheques. However, electronic receipts and card settlements may still take time to appear. Faster processing reduces some delays but does not remove every timing difference. An automatic bank feed imports transaction information into accounting software. Matching tools can connect that information with entries already recorded by the business. The owner must check suggested matches and prevent duplicate recording. Direct debits and card payments still require accurate entries, even when no paper document changes hands.

13:01The central distinction is between correcting the business’s records and explaining the bank’s remaining differences. Update the cash book for missing receipts, missing payments and its own errors. Then reconcile that balance with the statement through timing differences and bank errors. Whether transactions use cheques or digital payments, each unmatched item needs a clear explanation.