BANK RECONCILIATION

Why reconcile?
5/9/2016
Odeny Okelo

BANK RECONCILIATION
A statement prepared to link the bank balance shown in the cashbook with the balance shown in
the bank statement.
Timing differences. The difference between the bank statements and the cash book such as
unpresented cheques and outstanding lodgments (deposits).
Uncredited cheques: amount that have been paid into the bank but not yet recorded on the bank
statement
Unpresented ch3eques: cheques that have been issued but have not yet been paid in and deducted
from the account of the business
Purposes of bank reconciliation
To ensure that all receipts are banked into the bank account, banks send to their customers a
record of the transactions made through that account in the form of a bank statement.
It shows lodged/deposits into the account (credits) and money paid out (debits). The business
records bank transaction in the cashbook (bank column).
When a comparison is made between the bank balances as shown in the firms cashbook with
that shown on the bank statement, the two balances will be different. It is for this reason that a
bank reconciliation statement is prepared to reconcile the two balances. The reconciliation may
identify errors that may have been made in either the firms cashbook or in the bankss records.
Bank reconciliation between the cashbook balance and the bank statement balance simply means
an explanation of the differences, which takes the form of a written calculation.
Causes of differences between cash and bank balances
i.

Timing differences in recording of transactions

Unpresented cheques: are cheques paid out by the business but the recipients have not
presented them to the bank for payment (appearing in the cashbook as payment but not in
the bank statement)

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Uncredited cheques: are cheques received by the business but not credited into the bank

account (appearing in the cashbook as receipts but not in the bank statement)
Direct credits: payments received directly by the bank on behalf of the business but the
business is unaware of (appearing in bank statement as receipts but not in the cashbook).
This includes standing order for incoming payments received from customers/accounts

receivables, interest and refunds credited by banks

Bank charges: are fees charged by the bank for maintaining the account and for executing
transactions e.g. ledger fees, commission and other levies. (appear in the bank statement

but not in the cashbook)

Payment standing order: are instructions to the bank to execute payment on behalf of the
business. They include insurance (appearing in the bank statement but not in the

ii.

cashbook)
Unpaid cheques: are cheques paid to or out of business accounts but which are either
stopped by the drawer or are returned as dishonoured.
Errors made by either the business or by the bank in recording transactions
These errors may be caused on the part of the bank or in the cashbook entries e.g. under
casting or overcastting of figures.

Note: It Is A Good Business Practice To Prepare A Bank Reconciliation Statement Each Time
A Bank Statement Is Received. This Will Ensure That Any Queries Either with the Bank
Statement or in the Firms Cashbook Can Be Resolved.

BANK RECONCILIATION PROCESS

Step 1: identify the differences by ticking off the items that appear in both the cashbook and the
bank statement
Step 2: the unticked items on the bank statement include the bank charges, direct credits and
payment standing orders. These are entered into the bank columns of the cashbook to bring it up
to date (adjusted cashbook)
Step 3: the unticked items from the cashbook are the results of timing differences and are used to
prepare the bank reconciliation statement as follows

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Cashbook adjustments
Balance as per cashbook
Bank charges
Standing orders
Direct credits
Adjusted cashbook balances
Bank reconciliation statement as at (date)
Adjusted cashbook balance
Add Unpresented cheques
Less uncredited cheques
Balance as per bank statement

Xxx
(xxx)
(xxx)
Xxx
XXX
Xxx
Xxx
(xxx)
xxx

NOTES:
1: Bank Overdrafts
Business may overdraw their bank account. An overdraft is a negative bank balance. It is shown
as credit balance brought forward while the bank statement shows it as a debit balance. The bank
reconciliation statement process remains the same except that it starts with a negative cash
balance.
2: Dishonoured Cheques
A business may receive cheques which eventually are not honoured by the bank. It is good to
note that a cheque is an instruction by a person top his/her bank to pay another person from the
bank account. The bank may fail to honour the instruction if for some reason the instructions are
defective or there is no money in the account. The dishonoured cheques or cancelled cheques
should be corrected together with any errors before the reconciliation. The cashbook balance is
adjusted to remove the effects of the dishonoured cheques

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