Bookkeeping basics

Bank reconciliation

Correct the cash book, then explain the statement.

Draft: not yet reviewed by a teacher

Why it exists

The bank and the business record the same money at different times and sometimes with errors. Reconciling regularly finds missed charges, receipts and errors, and helps prevent fraud.

Key rules

There are two kinds of difference: items the business has not recorded or recorded wrongly (charges, direct debits, customer transfers, errors), and timing differences.
Omissions and errors in the cash book are corrected by entries in the cash book.
Timing differences, unpresented cheques and outstanding lodgements, appear only in the reconciliation; they don't change the cash book.
Statement balance = corrected cash book + unpresented cheques − outstanding lodgements.
The statement of financial position shows the corrected cash book balance, not the statement balance.
An overdraft is a credit balance in the books and a debit on the statement. Treat it as a negative number.

Examples

A printing firm at 31 May: cash book 4,620 Dr. On the statement but not in the book: bank charges 85, an insurance direct debit 340 and a customer transfer 1,200. Unpresented cheques 2,150, an outstanding lodgement 980.

Corrected cash book: 4,620 − 85 − 340 + 1,200 = 5,395
Statement: 5,395 + 2,150 − 980 = 6,565
Statement of financial position: bank 5,395

Correcting the book, then reconciling

Cash book: overdraft of 1,300 (a credit balance). Unpresented cheques 600, outstanding lodgement 400.

Statement: −1,300 + 600 − 400 = −1,100
The bank shows an overdraft of 1,100

Reconciling an overdraft

How it works

An unpresented cheque has already reduced the cash book but not yet reached the bank, so the statement shows more money: add it to the book balance to get the statement. An outstanding lodgement is in the book but not yet on the statement: deduct it.

Remember that the statement is written from the bank's point of view: a "credit" on the statement is money in the account.

Traps

Taught in the course

Key rules

There are two kinds of difference: items the business has not recorded or recorded wrongly (charges, direct debits, customer transfers, errors), and timing differences.

Omissions and errors in the cash book are corrected by entries in the cash book.

Timing differences, unpresented cheques and outstanding lodgements, appear only in the reconciliation; they don't change the cash book.

Statement balance = corrected cash book + unpresented cheques − outstanding lodgements.

The statement of financial position shows the corrected cash book balance, not the statement balance.

An overdraft is a credit balance in the books and a debit on the statement. Treat it as a negative number.