Bank Reconciliation

The process by which an account's balance as per the banks records is brought into agreement with the balance per the depositor's records. The form used to reconcile the balances is known as the bank reconciliation statement.

Bank Reconciliation Statement
A statement prepared once a month to bring about an agreement between the checkbook balance and the bank balance.

Bank Statement
A record that is sent by the bank, usually on a monthly basis, to indicate the bank's record of the activities within an individual checking account. The activities recorded on the statement include deposits, paid checks, various bank charges, collections made by the bank to the customer's account, and payments authorized from the customer's account.

A Bank reconciliation is the process of matching and comparing figures from accounting records against those presented on a bank statement. Less any items which have no relation to the bank statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank statement.

Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies.

Comparing the Bank Statement to the cashbook
When all of the receipts for a period have been written up in the cash receipts book and all of the cheque payments, standing orders and direct debits have been entered into the cash payment book, it is necessary to carry out any further checks possible on the cashbook. The most obvious check is to compare the entries in the cash receipts and cash payments book for the period, to the entries on the bank statement, although some care does need to be taken here.

Debits and Credits
One of the most obvious differences between the cashbook and the bank statement  is that the use of the terms debit and credit appear to be totally opposed to each other.

If cash is paid into the bank by a business this is a receipt and is entered in the cash receipts book as a debit entry. However, in the bank statement this will described as a credit effectively owes the money back to the business and therefore the business is a creditor to the bank.

Similarly, if the business writes a cheque out of the business bank account this will be entered in the cash payments book as a credit entry. From the bank's perspective however, this is known as a debit entry and any overdrawn balance is a debit balance.

How To Do A Bank Reconciliation
Summarised, the procedure for performing a bank reconciliation, in four simple steps:
Bank Reconciliation Example

1. Compare the cash receipts book to the receipts shown on the bank statement  (the credits on the bank statement) - for each receipt that agrees, tick the item in both cashbook and the bank statement.
2. Compare the cash payments book to the payments shown on the bank statement (the debits on the bank statement) - for each payment that agrees, tick the item in both the cashbook and the bank statement.
3. Any un-ticked items on the bank statement (other than rare errors made by the bank) will be items that should have been entered into the cash books, but have been omitted for some reason - these should be entered into the cashbook and then the amended balance on the cashbook can be found. To find the correct cashbook balance a ledger account is used for the bank with the original cashbook balance shown as the brought forward balance and any additional payments shown as credits and receipts as debits. This is ilustrated in the example.
4. Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques and outstanding lodgements - these will be used to reconcile the bank statement closing balance to the corrected cash book closing balance.