BAFS Study Notes: Control System - Bank Reconciliation Statement

Hello! Welcome to your study notes for one of the most practical topics in accounting: the Bank Reconciliation Statement. Don't worry if this sounds complicated – it's actually like being a detective! You'll learn how to find clues and solve the mystery of why your company's bank records don't match the bank's records. It's a super useful skill for any business.

By the end of these notes, you'll be able to:

1. Understand why a company's cash records and the bank's statement might show different balances.
2. Explain the purpose and importance of preparing a Bank Reconciliation Statement.
3. Confidently prepare one yourself!


Part 1: The Two Key Players - Cash Book vs. Bank Statement

Imagine you have a diary where you write down every dollar you spend and receive. Your friend, who manages your money for you, also keeps a list. At the end of the week, you both compare lists. Will they be identical? Probably not! This is the exact situation businesses face with their cash records.

1. The Cash Book (Bank Column)

This is the company's own record of all its bank transactions. Every time the business receives money into its bank account or pays money out (like writing a cheque), it's recorded here. Think of it as your diary of bank activities.

  • Money IN (receipts) is recorded on the Debit (Dr) side.
  • Money OUT (payments) is recorded on the Credit (Cr) side.
  • A normal, positive balance is a Debit balance. An overdraft (owing the bank money) is a Credit balance.
2. The Bank Statement

This is the bank's record of the company's transactions. The bank sends this to the company, usually every month. It shows all deposits, withdrawals, and bank charges. Think of it as your friend's list of your bank activities.

Super Important Point: The bank's perspective is the opposite of yours!

  • When you deposit money, the bank owes you that money. So, for the bank, it's a liability. Deposits are shown as a Credit (Cr).
  • When you withdraw money, the bank's liability to you decreases. Withdrawals are shown as a Debit (Dr).
  • A positive balance is a Credit balance. An overdraft is a Debit balance.
Quick Review: Whose View Is It?

Cash Book (Company's View):
Debit = Money In (+)
Credit = Money Out (-)

Bank Statement (Bank's View):
Debit = Money Out (-)
Credit = Money In (+)

This is a very common point of confusion, so take a moment to really let it sink in!

Key Takeaway

The Cash Book is the company's story, and the Bank Statement is the bank's story. They are about the same events, but told from different perspectives and sometimes at different times. The goal of a bank reconciliation is to make sure both stories match up and explain any differences.


Part 2: The Mystery - Why Don't The Balances Match?

It's perfectly normal for the balance in the Cash Book not to match the balance on the Bank Statement at a specific date. The reasons for these differences (or "discrepancies") usually fall into two main categories.

Category A: "We Know, But The Bank Doesn't Yet" (Timing Differences)

These are items the company has already recorded in its Cash Book, but they haven't been processed by the bank yet.

  • Unpresented Cheques:
    Example: Your company writes a cheque to pay a supplier for $500 on 30th June. You immediately record this $500 payment in your Cash Book. However, the supplier doesn't go to the bank to cash it until 3rd July. So, on 30th June, the bank doesn't know about this payment yet, and the money is still showing in your account on the bank statement.

  • Uncredited Deposits (or Lodgements):
    Example: On the afternoon of 30th June, your company deposits $1,000 cash into the bank. You record this receipt in your Cash Book. But because it was late in the day, the bank only processes and records this deposit on 1st July. So, on 30th June, this $1,000 hasn't appeared on your bank statement yet.
Category B: "The Bank Knows, But We Don't Yet"

These are items that appear on the Bank Statement, but the company hasn't recorded them in its Cash Book yet because it wasn't aware of them until it saw the statement.

  • Bank Charges: The bank charges a fee for its services (e.g., monthly account fee). This is deducted directly from the account.

  • Interest Earned / Allowed: The bank pays you interest on your balance. This is added directly to your account.

  • Direct Debits / Standing Orders: These are automatic payments you've authorised the bank to make for you on a regular basis (e.g., paying your electricity bill or rent).

  • Credit Transfers / Direct Credits: A customer pays you by depositing money directly into your bank account. You won't know about it until you see the bank statement.

  • Dishonoured Cheques: A cheque you received from a customer and deposited has "bounced" (the customer didn't have enough money). The bank originally credited your account but will now reverse that entry (debit your account).
Key Takeaway

Differences between the Cash Book and Bank Statement are caused by timing differences (things not yet processed by the bank) and items unknown to the company until it receives the statement. It's not usually a sign of a big problem, just a puzzle to be solved!


Part 3: The Solution - Functions of a Bank Reconciliation Statement (BRS)

So, we have two different balances and a list of reasons why. The Bank Reconciliation Statement (BRS) is the document we create to solve this puzzle. It's an essential part of a company's financial control system.

Why do we prepare a BRS? (Its Functions)
  1. To identify and explain the differences: Its main job is to clearly show exactly why the Cash Book balance and the Bank Statement balance are different.

  2. To check for accuracy: It helps the company spot any errors it might have made in the Cash Book, or (very rarely) any errors the bank has made on the statement.

  3. To detect and prevent fraud: By regularly checking the bank transactions, a company can spot unauthorised withdrawals or other suspicious activity quickly. It's a key internal control tool.

  4. To arrive at the correct bank balance: The BRS helps determine the true, up-to-date cash position of the business, which is needed for preparing the Statement of Financial Position (Balance Sheet).
Did you know?

Regularly reconciling bank accounts is one of the most important habits for small business owners. It helps them manage their cash flow and avoid bouncing cheques or missing payments!

Key Takeaway

A Bank Reconciliation Statement isn't just a mathematical exercise. It's a vital health check for a company's cash, helping to ensure accuracy, security, and proper financial reporting.


Part 4: Let's Build a BRS! A Step-by-Step Guide

Ready to be the detective? Follow these two simple steps. It's crucial you do them in this order!

Step 1: Update The Cash Book!

This is the most important step! Before you even start the BRS, you must update your Cash Book with all the information the bank knew about but you didn't (Category B items from above).

You need to:

  • Debit the Cash Book for all money IN that you just found out about (e.g., Interest Earned, Credit Transfers).
  • Credit the Cash Book for all money OUT that you just found out about (e.g., Bank Charges, Direct Debits, Dishonoured Cheques).

After you do this, you will calculate a new balance. This is called the 'Updated Cash Book Balance' or 'Adjusted Cash Book Balance'. This is the true cash balance of the company.

Step 2: Prepare the Bank Reconciliation Statement

Now you can prepare the statement itself. The goal is to prove that if we account for the timing differences (Category A items), the updated Cash Book balance will match the Bank Statement balance.

There are two ways to present it. Both are correct and give the same result! Let's focus on the most common one.

Format: Starting with the Updated Cash Book Balance

Let's use a simple example. After updating our Cash Book (Step 1), we have:

  • Updated Cash Book Balance: $9,000
  • Bank Statement Balance: $10,500
  • Our detective work finds:
    • Unpresented Cheques totalling $2,000
    • Uncredited Deposits totalling $500

Here’s how we prepare the BRS:

Example Company Ltd.
Bank Reconciliation Statement as at 30 June 202X

Balance as per updated Cash Book ........................................... $9,000
Add: Unpresented cheques ........................................................... $2,000

......................................................................................................... $11,000
Less: Uncredited deposits .......................................................... ($500)
Balance as per Bank Statement ................................................ $10,500

Tada! It balances! We have successfully explained the difference. We started with our true balance ($9,000) and adjusted it for the items the bank doesn't know about yet to arrive at the balance the bank is currently showing ($10,500).

Watch Out! Bank Overdrafts

Sometimes a company has an overdraft (a negative balance). The logic is the same, but the signs are reversed!

  • An overdraft in the updated Cash Book is a Credit (Cr) balance.
  • An overdraft on the Bank Statement is a Debit (Dr) balance.

When preparing the BRS for an overdraft, you would start with a negative figure, but the rules of 'Add Unpresented Cheques' and 'Less Uncredited Deposits' remain the same!

Key Takeaway

Always update the Cash Book FIRST for items the bank already recorded. Then, prepare the BRS to reconcile the updated Cash Book balance with the Bank Statement balance by adjusting for timing differences (unpresented cheques and uncredited deposits).