Bank Reconciliation

Key Concepts

Bank reconciliation is the process of comparing the ending balance in the business's cash at bank account with the balance on the bank statement to explain any differences. These differences arise because the business and the bank record transactions at different times, or due to errors.

Purposes of bank reconciliation:

1. Identify errors in the cash at bank account or the bank statement
2. Deter fraud
3. Ensure the cash at bank balance is accurate and up to date

Causes of Discrepancies

Note on perspectives:

• In the business's books, cash at bank has a debit balance (an asset)
• In the bank statement, the same balance appears as a credit balance (money the bank owes the business)
• If the business has a bank overdraft, the cash at bank has a credit balance in the books and a debit balance on the bank statement

Items in the cash at bank account but NOT yet in the bank statement:

Items in the bank statement but NOT yet in the cash at bank account:

How to Remember

Two-stage process:

1. Update the cash at bank account — start from the last balance in the cash at bank account; add items from the bank statement missing from the cash at bank account (bank charges, direct deposits/payments, dishonoured cheques).
2. Prepare the bank reconciliation statement — start from the bank statement balance; add items from the cash at bank account not yet on the bank statement (deposits in transit); less cheques not yet presented → result must equal the updated cash at bank balance.

The bank reconciliation statement always starts from the bank statement balance, not the cash at bank balance.

Steps to Perform a Bank Reconciliation

Step 1 — Check that the opening balances match

Confirm that the opening balance in the cash at bank account is the same as the opening balance on the bank statement. If they differ:

• Look for entries at the start of the month that may explain the difference — usually a timing difference carried over from the previous period, where one side (the business or the bank) recorded an item later than the other
• For example, if a cheque appears on the bank statement but not in the current cash at bank account, check the cheque number. If it is lower than any cheque number in the current cash at bank account, it was already recorded in the cash at bank account in a previous period — the bank was simply late in recording it. Tick it off on the bank statement; it is not a reconciling item this period.

Step 2 — Cross-check entries

When comparing the two records, always tick off entries diagonally across — compare debit entries in the cash at bank account against the receipts column in the bank statement, and credit entries against the payments column.

(Column names vary by bank — e.g. "Deposits" instead of "Receipts", "Withdrawals" instead of "Payments" — but always match diagonally, not straight across.)

Tick off matching entries in pencil in both records. Unticked items are the ones causing the difference:

• Items on the bank statement not yet in the cash at bank account → update the cash at bank account (Step 3)
• Items in the cash at bank account not yet on the bank statement → include in the bank reconciliation statement (Step 4)

Also watch out for errors:

• Errors most commonly occur in the cash at bank account — correct by debiting or crediting the cash at bank account in Step 3, alongside the other missing items
• Errors in the bank statement are less common — include as a reconciling item in the bank reconciliation statement

Step 3 — Update the cash at bank account

Start from the last balance in the cash at bank account (Balance b/d), entered on the last day of the month — the period-end date (e.g. 31 July).

Add all items that appear in the bank statement but are missing from the cash at bank account, all dated at the period-end date (e.g. 31 July):

• Debit (add): direct deposits, credit transfers, bank interest income
• Credit (deduct): direct payments, bank charges, bank interest expense, dishonoured cheques

Also correct any errors found in the cash at bank account here — debit or credit the account as needed to fix the error (see Bank Reconciliation with Errors).

Note:

The bank statement uses its own labels. When recording items in the cash at bank account, always use the correct account name — for example, "standing order — rent" becomes Rent expense, "deposit — commission" becomes Commission income, "credit transfer — [name]" becomes Trade receivables — [name].

Bring down the new balance to the first day of the next month (e.g. 1 August) — this is the updated cash at bank balance that the bank reconciliation statement must reconcile to.

Step 4 — Prepare the Bank Reconciliation Statement

Start from the bank statement balance and reconcile to the updated cash at bank balance: