Welcome to Bank Reconciliation Statements!

Hello! This chapter might look intimidating, but it’s actually one of the most practical and important parts of Accounting. Think of this as the essential control process where the business plays detective, ensuring that its own records match the bank’s official records.

You are learning about Internal Controls—the checks and balances a business puts in place to prevent mistakes and fraud. The Bank Reconciliation Statement (BRS) is a brilliant example of a strong control process!

Don't worry if this seems tricky at first. We will break down every step using simple analogies!

The Control Process: Why We Reconcile

A business keeps track of all money deposited and withdrawn from its bank account in a record called the Cash Book (specifically, the Bank Column). The bank, meanwhile, keeps its own independent record, which it sends to the business (the Bank Statement).

Why the Two Balances Are Often Different

If a business is careful, shouldn't its Cash Book balance always match the Bank Statement balance? Surprisingly, no! They almost always differ, and the job of the BRS is to explain those differences.

The differences arise for two main reasons:

  1. Errors and Omissions (Mistakes in our Cash Book): We forgot to record something or made a calculation error.
  2. Timing Differences (The Bank hasn't caught up yet): We recorded a transaction, but the bank hasn't processed it yet, or vice versa.

Quick Analogy: Imagine you lend your friend $10. You write it in your notebook immediately. Your friend doesn't pay you back until tomorrow. Your notebook balance is different from your actual wallet balance until tomorrow. That delay is a timing difference!

Understanding the Key Records

1. The Cash Book (Our Record)

This is the firm's primary source of information regarding bank transactions.

  • Money received (Receipts) is recorded on the Debit (Dr) side.
  • Money paid out (Payments) is recorded on the Credit (Cr) side.

2. The Bank Statement (The Bank’s Record)

This is an external document provided by the bank. Crucially, the bank sees things differently than we do!

  • When we deposit money (asset increase), the bank sees it as their liability (they owe us the money). Therefore, deposits are shown as Credits on the Bank Statement.
  • When we withdraw money, the bank reduces its liability. Therefore, withdrawals are shown as Debits on the Bank Statement.

Memory Aid: The Accounting Mirror
Our Cash Book Debit = Bank Statement Credit (Money in)
Our Cash Book Credit = Bank Statement Debit (Money out)

The Step-by-Step Reconciliation Process

The reconciliation process is split into two logical stages. This separation is crucial for success!

Stage 1: Updating the Cash Book (For Errors and Omissions)

Before comparing our balance to the bank's, we must make sure our Cash Book is complete and accurate. We must record any transactions the bank knows about, but we didn't.

Common Cash Book Adjustments (The 4 Must-Dos):

These items require a Double Entry adjustment directly in the firm’s Cash Book:

  1. Bank Charges / Interest Charged: These are fees deducted automatically by the bank (e.g., account maintenance fees). Since we only find out when we receive the Bank Statement, we must record them now.
    Action: Credit (reduce) the Cash Book.
  2. Direct Credits / Interest Received: Funds paid directly into our account by a customer or interest paid by the bank. We were unaware until the Bank Statement arrived.
    Action: Debit (increase) the Cash Book.
  3. Dishonoured Cheques (Referred to as D/D): A customer’s cheque we deposited turned out to be worthless (e.g., the customer had insufficient funds). The bank initially credited our account but then removed the money.
    Action: Credit (reduce) the Cash Book.
  4. Errors in the Cash Book: If we accidentally recorded a payment of $100 as $10, we must correct this error in the Cash Book.

Key Takeaway for Stage 1: We are creating the Adjusted Cash Book Balance. This final balance is the true cash figure the business has in the bank and is the balance used in the Statement of Financial Position (Balance Sheet).

Stage 2: Preparing the Bank Reconciliation Statement (For Timing Differences)

Once the Cash Book is adjusted, we prepare the BRS. This is a simple statement (a memorandum record, not a double-entry account) that starts with the adjusted Cash Book balance and seeks to explain how to reach the Bank Statement balance.

The BRS only includes Timing Differences—items that one party knows about, but the other has not yet processed.

Common BRS Items (Timing Differences):
  1. Outstanding Lodgements (Deposits in Transit):
    These are cheques or cash the business deposited late in the day or right at the month-end. We have recorded them in our Cash Book, but the bank hasn't yet processed (credited) them.
    Action: Add to the Adjusted Cash Book Balance.
  2. Unpresented Cheques (Outstanding Cheques):
    These are cheques we have written to suppliers and recorded in our Cash Book, but the suppliers have not yet cashed them. The bank is unaware of these payments until they are presented.
    Action: Deduct from the Adjusted Cash Book Balance.

The Goal:
Adjusted Cash Book Balance
Plus: Outstanding Lodgements
Less: Unpresented Cheques
Must equal the Bank Statement Balance.

Did you know? The Bank Reconciliation is usually prepared by someone different from the person who keeps the Cash Book. This separation of duties is another layer of strong internal control!

Common Mistakes to Avoid

Struggling students often mix up which item goes where. Use this rule:

Mistake 1: Confusing Cash Book Adjustments and BRS Items
  • If the bank has completed the transaction, but we hadn't recorded it (e.g., bank charge, direct deposit): ALWAYS update the Cash Book (Stage 1).
  • If we have completed the transaction, but the bank hasn't processed it (e.g., outstanding lodgement, unpresented cheque): ALWAYS put it in the BRS (Stage 2).
Mistake 2: Forgetting the Effect of a Dishonoured Cheque

When a cheque is dishonoured, the initial entry (Debit) must be reversed. You need to Credit your Cash Book, reducing your bank balance.

Important Note on Bank Overdrafts: If the Bank Statement starts with a Credit balance, it means you have an overdraft (you owe the bank money). When starting the BRS, remember that additions will reduce the overdraft and deductions will increase the overdraft.

Quick Review: The BRS Flowchart

Step 1: Get the True Balance (Update the Cash Book)

Start with the Balance b/d from the Cash Book.

  • + Direct Credits / Interest Received (Debit)
  • - Bank Charges / Dishonoured Cheques (Credit)
  • = Adjusted Cash Book Balance (This is the amount used in the Statement of Financial Position)

Step 2: Reconcile to the Bank Statement (The BRS)

Start with the Adjusted Cash Book Balance (from Step 1).

  • + Outstanding Lodgements / Deposits in Transit
  • - Unpresented Cheques
  • = Balance as per Bank Statement

If your final total matches the closing balance on the Bank Statement, congratulations! You have successfully reconciled and proven the reliability of your control process.


Keep practicing these steps, and bank reconciliation will become second nature!