You have now learnt how to balance the cashbook and to find the balance of the bank account. In this chapter we look at the way in which a business deals with any differences between the balance of the bank account in the cashbook and the closing balance of
the bank account shown by the bank statement for the same period. These differences are explained by a document known as bank reconciliation statement. The bank reconciliation statement lists the items which are in the cashbook but not on the bank statement and, items which are on the bank statement but not in the cashbook. This process enables the business to update its cashbook and also helps to prove the accuracy of the bookkeeping of the business and the bank.
By the end of this topic you should be able to:
Compare transactions that appear on both cash book and bank statement ii)
Identify causes of difference between cashbook and bank statement balance iii)
Update cash book from details of transactions appearing on bank statement iv)
Identify unpresented and uncredited cheque
Calculate balance as per bank statement
Prepare a bank reconciliation statement
Bank reconciliation statement: A statement prepared to link the bank balance shown in the cashbook with the balance shown on the bank statement.
Timing differences: Differences between the bank statement and the cash book that will be corrected over time, such as unpresented cheques and outstanding lodgments. Uncredited Cheques: Amounts that have been paid into the bank, but not yet recorded on the bank statement.
Unpresented cheques: Cheques that have been issued but have not yet been paid in and deducted from the account of the business
Purpose of bank reconciliation
One tool of maintaining proper record discipline is to ensure that all receipts are banked into the bank account intact. Banks sends to their customers a record of the transactions made through that account in the form of a bank statement. It shows money lodged into the accounts (described in the bank statement as credits) and money paid out (described in the bank statement as debits). The business records bank transactions in the cashbook, bank column. It is possible that some of the entries in the cashbook differ from those of the bank due to time lag in receipt of information or due to errors. Often, when a comparison is made between the bank balances as shown in the firm’s 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 (‘tally up’) the two balances. The reconciliation may identify errors that may have been made in either the firm’s cashbook or in the bank’s records. A bank statement is a copy of business bank account transactions as recorded by the bank. Bank statements are regularly sent out to customers usually on monthly basis. This enables the customer to check their funds in the bank regularly and to update their records accordingly. 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 BALANCE
The difference between the cashbook and the bank statement balance results from two factors: i)
Timing difference in recording of transactions.
Errors made by either the business or by the bank in recording transactions. Timing Differences
These are differences caused by time lag in the receipt of information or recording of a transaction between the bank and the business. Examples include: i) Unpresented cheques
Unpresented cheques are cheques paid out by the business but the recipients have not presented them to the bank for payment. For instance the business-paying cashier may send cheques out to suppliers, some of whom may pay in the cheque at the bank...