BANK RECONCILIATION STATEMENT
Every customer (individual or firm) keeps a record of its bank current account. The bank also
keeps a record of this account and sends a statement to the firm at the end of each, normally
every month. For various reasons the latest balance on the bank statement is unlikely to be the
same as the latest balance in the customer’s cash book, the main reason being that the customer
and the bank have access to the different information at different times; errors and omissions can
also occur.
The following are items which the customer will know of but the bank will not:
•Cheques drawn by the customer on his account which have not yet been presented to the
bank by the recipients
•Cheques received by the customer and deposited into the account but not yet cleared by
the banking system
•Cheques returned to drawer, i.e. cheques paid to customer which were not covered by
sufficient funds in the drawer’s account and which the bank has returned to him,
cancelling the credit in the customer’s account.
There are also items which the bank will know of but the customer will not:
•Bank charges debited by the bank to the customer’s account
•Credit transfers received by the bank on behalf of the customer which the customer has
not yet been notified of
•Standing orders and direct debits which the bank pays automatically but which the firm
has forgotten to enter into its account.
On receiving the bank statement each month, the person in charge of the bank account should
prepare a bank reconciliation statement which will explain in detail the difference between the
bank’s balance and the firm’s own balance. The procedure is as follows.
✓The cashier should carefully go through the entries on the bank statement and in the
customer’s bank account and cross off those which appear correctly in both. Any items
which appear in one but not the other should be noted and any errors or unexplained
items in the statement should be checked.
✓The bank account in the cash book must now be brought up to date by entering those
items on the bank statement which had not been included in the customer’s bank
account. The bank account will now be correct and up to date.
✓The final balance on the corrected bank account must now be reconciled with the final
balance on the bank statement. The easiest way to do this is to begin with the statement
balance (which is wrong), add on any uncleared chaeques and deduct any unpresented
ones. The balance which results should now equal the balance in the corrected bank
account.
PURPOSE OF BANK RECONCILIATION
It should be prepared regularly as part of the internal control system of the business to check:
a. The accuracy of the cash book
b. The accuracy of the bank statement
c. That undue delay is not occurring between payments, receipts and their clearance by the
bank
