Accounting (9215) | Bank reconciliation statements.

📝 Mastering Bank Reconciliation Statements (9215)

Hello future accountants! This chapter is all about becoming a financial detective. Don't worry if this seems tricky at first—we are simply learning how to make sure the company’s records match the bank’s records. This process is crucial for the Verification of accounting records section, ensuring our financial statements are accurate and reliable. Let’s dive in!

🔍 Why Do We Need Bank Reconciliation?

Imagine you have recorded every single time you spent money in your personal notebook (this is your company’s Cash Book). Now, you look at the statement sent by your bank (the Bank Statement). Often, the final balance in your notebook and the final balance on the bank statement are different!

The goal of the Bank Reconciliation Statement (BRS) is not to change the bank's records, but to explain exactly *why* these two balances are different and to make sure our own records (the Cash Book) are up to date.

📚 The Two Records We Compare

To reconcile, we need to compare two distinct sets of records:

1. The Cash Book (Bank Column)

This is the business’s internal record of all cash transactions passing through the bank account.

• Receipts are recorded on the debit side. (Money coming in increases the balance.)
• Payments are recorded on the credit side. (Money going out decreases the balance.)
• The final figure is the Cash Book Balance.

2. The Bank Statement

This is the record kept by the bank showing all transactions that have actually cleared the bank account.

• When the bank receives money for you (a deposit), they credit your account.
• When money leaves your account (a payment), they debit your account.
• The final figure is the Bank Statement Balance.

🛑 Reasons Why the Balances Differ

The differences usually fall into three categories. Understanding these categories tells us whether the Cash Book needs correcting or if the difference is just temporary.

1. Timing Differences (Only explained in the BRS)

These happen when one party (the business or the bank) has recorded the transaction, but the other has not yet completed the processing.

• a) Unpresented Cheques (Outstanding Cheques):

  The business issues a cheque and immediately records the payment in the Cash Book (credit side). However, the supplier has not yet deposited or cashed the cheque. The bank has not seen it yet!
  Result: Cash Book balance is lower than Bank Statement balance.

• b) Deposits or Lodgements Not Credited (Outstanding Deposits):

  The business takes cash/cheques to the bank and records the receipt in the Cash Book (debit side). If the bank statement is prepared before the bank processes this deposit (e.g., late Friday deposit), it won't show up on the statement yet.
  Result: Cash Book balance is higher than Bank Statement balance.

2. Items Recorded by the Bank But Not by the Business (Requires Cash Book Adjustment)

These transactions appear on the bank statement, but the business only finds out about them when they receive the statement. These MUST be entered into the Cash Book.

• Bank Charges / Service Charges: The bank deducts fees (e.g., maintenance). (Record as a credit (payment) in the CB.)
• Interest Received (Credit Interest): The bank pays the business interest on its balance. (Record as a debit (receipt) in the CB.)
• Direct Debits / Standing Orders: Regular payments automatically taken by suppliers. (Record as a credit (payment) in the CB.)
• Dishonoured Cheques (Refer to Drawer/RD): A customer’s cheque was deposited, recorded as a receipt in the CB, but the customer’s bank refused to pay it (e.g., insufficient funds). (Record as a credit (payment/reversal) in the CB.)

3. Errors (Can affect either the CB or the BRS)

A transaction might have been recorded with the wrong amount, or perhaps duplicated, by either the business or the bank.

• Error in the Cash Book: We must correct the Cash Book entry.
• Error by the Bank: This is rare, but if it happens, it is reported to the bank and explained in the BRS until the bank corrects it.

✍️ The Two-Step Process of Reconciliation

The reconciliation process must always be completed in this order:

Step 1: Adjusting the Cash Book (Finding the True Balance)

We start with the existing Cash Book balance and correct it by adding or subtracting all the items we learned about from the Bank Statement (Category 2 items).

Process:

1. Start with the original Cash Book balance (B/D).
2. Add (Debit) any receipts or interest shown on the bank statement that were not in the CB.
3. Subtract (Credit) any bank charges, direct debits, standing orders, or dishonoured cheques shown on the bank statement that were not in the CB.
4. Calculate the new balance, which is the Adjusted (or Updated) Cash Book Balance (C/D).

This new figure represents the actual amount of money the business has, according to records that are now fully up to date.

Step 2: Preparing the Bank Reconciliation Statement (Explaining the Remaining Differences)

This is a separate statement (not part of the double entry system) used to prove that the Adjusted Cash Book Balance agrees with the Bank Statement Balance, after accounting for timing differences.

The BRS layout usually starts with either the Adjusted Cash Book Balance or the Bank Statement Balance. Let’s look at the most common method: Starting with the Adjusted Cash Book Balance.

[Business Name]
Bank Reconciliation Statement
as at [Date]

Adjusted Cash Book Balance (from Step 1) ................. £ X,XXX
ADD: Unpresented Cheques (Payments recorded by us, not by bank) . + £ YYY
LESS: Uncredited Deposits (Receipts recorded by us, not by bank) . - £ ZZZ

Balance as per Bank Statement ............................ £ A,AAA

💡 Understanding the Logic of Additions and Subtractions

Don't just memorize the rules; understand why we add or subtract specific items. We are trying to move the Adjusted Cash Book Balance back towards the Bank Statement Balance.

Let’s use the Unpresented Cheques example:

1. Your Adjusted CB balance is £1,000.
2. You wrote a cheque for £100 (Unpresented). You subtracted this £100 in your CB, so your £1,000 is after the payment.
3. The bank hasn't seen the cheque yet. Their balance is still £1,100.
4. To move your CB balance (£1,000) towards the bank's balance (£1,100), you must ADD BACK the £100.

🚫 Common Mistakes Students Make

Avoid these pitfalls, especially when dealing with negative balances (overdrafts):

• Mistake 1: Forgetting to update the Cash Book (Step 1). Items like bank charges and interest never go directly into the BRS. They must first adjust the Cash Book.
• Mistake 2: Confusing deposits with payments. A dishonoured cheque is a receipt reversal; it means the money didn't arrive, so you must treat it like a payment (credit the CB).
• Mistake 3: Treating an overdraft incorrectly. If the Cash Book starts with a credit balance (overdraft), then all "additions" (receipts) will reduce the overdraft, and "subtractions" (payments) will increase the overdraft.
• Mistake 4: Including timing differences (Unpresented Cheques/Uncredited Deposits) in the Cash Book. These belong only in the BRS (Step 2).

📈 The Final Balance and Statement of Financial Position (SFP)

After all this work, which figure do you use in the company’s final accounts, like the Statement of Financial Position (SFP)?

The balance reported in the SFP under current assets (or current liabilities if an overdraft) is always the Adjusted Cash Book Balance (the C/D balance from Step 1). This is the true, current balance held by the business after accounting for all known transactions.

You have successfully verified your bank records! This skill proves that the figures reported in your books are reliable and accurate, which is essential for audit and verification purposes.