The Bank reconciliation

It is important that the cash book (or bank account in the nominal ledger) is regularly reconciled to the bank statement. It is suggested that this be done at least monthly and perhaps more frequently. It should certainly be done at the balance sheet date.

  The writer Ernest Hemingway often did not bother to bank cheques that he received, preferring instead to use them as bookmarks. After his death his house was found to contain many unbanked cheques, some as much as 20 years old. Although the cheques were very seriously out of date m~ny of them were subsequently honoured. This is an extreme example of why the bank statement balance might not be the same as the cash book balance and why it is necessary to reconcile the two figures. Such bizarre behaviour is unlikely in businesses, but bank reconciliations are necessary to show that mistakes have not been made (if this is the case), to identify any errors so that they can be corrected, and to properly control the cash resources and borrowing.

Possible reasons for differences in the two figures to be reconciled are:

• Cheques written in the cash book have not yet been debited to the bank statement.

• Receipts written in the cash book have not yet been credited to the bank statement.

• Items have been debited to the bank statement that have not yet been written in the cash book. Common examples are direct debits, standing orders and bank charges.

• Receipts have been credited to the bank statement that have not yet been written in the cash book. This could for example include a receipt from a customer paid directly to the bank account by the BACS system.

• You have made a mistake. Perhaps the wrong amount has been written into the cash book or a paying-in slip has been added incorrectly.

• The bank has made a mistake. This is unlikely, but it can happen. Cynics might think that it is more likely now than in past years.

The task of preparing the bank reconciliation should be approached in a methodical manner. The bank statement should be ticked to the cash book, then any differences should be noted, investigated and written down logically. If it is done correctly, the two figures will reconcile. This is, of course, provided that the opening balances reconciled. This is another way of saying that the bank reconciliation at the end of the previous period was correct.

This is best illustrated with an example. The following is a simplified bank statement for the company whose cash book was reproduced earlier in this chapter. It is for September, corresponding with the period covered by the cash book. As it is a bank statement, receipts are printed on the right, the opposite side to the normal cash book layout.



The Bank reconcilation is as fllows: