Bank reconciliation: worked examples

Method and where the marks are

A bank reconciliation explains why the cash book balance and the bank statement balance differ on the same date. Once the differences are dealt with, the two agree.

The method has two stages. Keep them apart.

Stage one updates the cash book for items the bank knew about but the business did not. Stage two prepares a separate reconciliation statement for items the business recorded but the bank has not yet processed. The most common structural error is to blur the stages by putting bank charges into the reconciliation statement instead of the cash book.

For stage one, compare the cash book and bank statement line by line and tick every item that appears in both. Investigate whatever is left.

Items on the bank statement but not in the cash book usually include bank charges, interest, standing orders, direct debits, amounts credited directly, and dishonoured cheques. These are real transactions the business had not entered. Add receipts the bank has credited and deduct charges and payments the bank has taken.

Then balance the cash book to get the corrected figure. Suppose the cash book showed RM3,200 and you learn of bank charges of RM50 and interest received of RM30. The corrected balance is 3,200 − 50 + 30 = RM3,180.

Stage two starts from the corrected cash book balance and works to the bank statement balance. Now deal with timing differences. Unpresented cheques are cheques the business has written and recorded, but the payees have not yet banked.

The cash book has already been reduced, but the bank has not. So add them to the corrected cash book balance. Uncredited lodgements are deposits the business has recorded, but the bank has not yet credited.

The cash book has already been increased, but the bank has not. So subtract them. The answer is the bank statement balance.

If a question starts from the bank statement balance, reverse both signs. Work out the direction by asking which record is ahead, not by memorising a rule.

Timing differences never change the cash book, because the business's own entries are already right. The bank is just behind. Recording differences never appear in the reconciliation statement, because they are corrections to the business's own book.

The test is simple. Did the business fail to record something (stage one)?

Or did it record something the bank has not yet caught up with (stage two)? Label the reconciliation clearly, start it from the corrected cash book balance, and show each item on its own line.

Take extra care with overdrafts and errors. An overdraft is a credit balance in the bank's records and is negative for the business. Write it as a bracketed or negative figure, and check that each adjustment still moves the total the right way.

Errors in the cash book, such as a transposed figure or a payment entered twice, are corrected in stage one. Errors made by the bank are noted in the reconciliation statement, because the business cannot change the bank's records.

The frequent mistakes are crossing the two stages and reversing the direction of an adjustment under time pressure. Another is reconciling from the original cash book figure instead of the corrected one. Always check that the reconciliation arrives at the bank statement balance. If it does not, it has not done its job.

If you often lose marks on which items belong in the cash book and which in the reconciliation, we can help. One of our teachers can sort a set of past-paper items with you until the test becomes automatic. Book a trial class