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Bank reconciliation statements
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The cash book bank balance and the bank statement rarely agree. A bank reconciliation explains the difference.
Why the balances differ
Timing differences:
Unpresented cheques: cheques paid out and in the cash book, but not yet taken from the bank account.
Outstanding lodgements: money paid in and in the cash book, but not yet on the bank statement.
Items not yet in the cash book: bank charges, interest, direct debits, standing orders, credit transfers received and dishonoured cheques.
Errors in either record.
Unpresented cheques: cheques paid out and in the cash book, but not yet taken from the bank account.
Outstanding lodgements: money paid in and in the cash book, but not yet on the bank statement.
Items not yet in the cash book: bank charges, interest, direct debits, standing orders, credit transfers received and dishonoured cheques.
Errors in either record.
The process
1. Compare the cash book with the bank statement and tick matching items.
2. Update the cash book with items on the statement not yet recorded (bank charges, direct debits, credit transfers and so on) and find its corrected balance.
3. Prepare the bank reconciliation statement:
Balance per bank statement
add outstanding lodgements
less unpresented cheques
= balance per updated cash book.
2. Update the cash book with items on the statement not yet recorded (bank charges, direct debits, credit transfers and so on) and find its corrected balance.
3. Prepare the bank reconciliation statement:
Balance per bank statement
add outstanding lodgements
less unpresented cheques
= balance per updated cash book.
Example
The cash book shows £1200 in the bank. The bank statement shows bank charges of £30 and a credit transfer received of £250, not yet in the cash book. Find the updated cash book balance.
- Bank charges reduce the balance: 1200 − 30
- Credit transfer increases it: + 250
Answer: £1420
Differences come from unpresented cheques, outstanding lodgements, items not yet in the cash book and errors. Update the cash book first. Then: bank statement balance + outstanding lodgements − unpresented cheques = updated cash book balance.
The interactive lesson includes the diagrams for this topic.
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