Bank reconciliation Statement

The purpose of the bank reconciliation is to explain any

difference between the bank balance appearing in the cash
book of a business and the balance appearing on the bank
statement provided by the bank. The bank statement is a
copy of the account of the business as it appears in the
books of the bank. This is obviously from the viewpoint of
the bank. The customer’s account will have a credit balance
if there is money in the account, as this is the amount the
bank owes the customer (a liability of the bank). Where the
customer has an overdraft, the account will show a debit
balance as this is the amount the customer owes the bank
(as asset of the bank).

The bank statement must be compared with the bank

account in the cash book .If the balances differ it is
necessary to reconcile them, that is , explain why differences
have arisen .

Reasons for differences between cash book

and bank statement

(1) Items in the cash book but not in the bank

statement: These are usually due to differences in the
time at which items are recorded. These timing
differences are often due to –

(a) Cheque not yet presented, which are cheques that

have been paid by the business and credited in the cash
book, but which do not appear on the bank statement. It
will be some time before these cheques pass through the
banking system and are deducted from the business’s
bank account .Until these cheques are debited by the
bank; the cash book will show a lower balance than that
shown on the bank statement.
 (b) Amounts not yet credited, which are cheques and
others amounts which have been paid into the bank and
debited in the cash book, but which do not appear on the
bank statement. These items may not be recorded by the
bank for a day or so. Until these items re credited by the
bank, the ash will show a higher balance than that shown
on the bank statement.

2. Items in the bank statement but not in the cash

book

A. Amounts received by the bank which have been paid d

directly into the business’s bank account. These include
standing orders and credit transfers when a person has
instructed their account of the business. Interest or dividend
received may also be paid directly into the business’s bank
account.

B . Amounts paid by the bank to other people. These include

credit transfers, standing orders and direct debits which the
business has instructed the bank to pay directly from the
bank account of the business

C. bank charges and bank interest which the bank has taken
from the business account to cover the costs of running the
account and for any interest on load or overdrafts the
business may gave

D. dishonored cheques these are cheques paid into the

bank but which have been returned as the drawer of the
cheque did not have sufficient funds to cover the cheqeue

E . Bank error