Bank reconciliation statements (AS Level) Financial accounting

 

A bank reconciliation statement is a statement prepared periodically to ensure that the balance on the bank account in the business cash book matches the balance shown on the bank statement. Its main purpose is to show the correct balance on a bank account.

The completion of this statement and subsequent reconciliation helps to verify the accuracy of the bookkeeping by ensuring the difference between the two records is due only to timing differences and not to errors in either record.

Reasons for Disagreement

The balance recorded in the company’s cash book often does not agree with the balance shown on the bank statement at a specific date. This non-agreement can be caused by two main reasons:

1. Timing Differences: This refers to the delay between when items are recorded in the cash book and when they appear on the bank statement. Examples often include:
• Unpresented Cheques: Cheque payments recorded in the cash book but not yet appearing on the bank statement.
• Amounts paid into the bank but not yet credited (banked but not yet processed).
2. Items Missing from the Cash Book: These are transactions that appear on the bank statement but have not yet been recorded in the business's books. Examples include:
• Bank charges and interest paid or received.
• Direct debits or standing orders.
• A customer’s cheque being returned as dishonoured.

Relationship Between Cash Book and Bank Statement

It is vital to remember the opposing nature of the accounts:

• The bank statement is the bank's record of the customer's account.
• Items debited in the customer's cash book appear as credits on the bank statement.
• Items credited in the customer's cash book are debited on the bank statement.

For example, a normal debit balance in the cash book (money the business holds) will appear as a credit balance in the bank statement. If the account is overdrawn, the business owes the bank money, and this will appear as a credit balance in the cash book and a debit balance on the bank statement.

Steps to Prepare a Bank Reconciliation Statement

The sources outline a three-step process for preparing a bank reconciliation statement:

1. Compare and Tick: Compare the entries in the cash book with the bank statements, ticking off items that appear in both.
2. Adjust the Cash Book: Enter any items that remain unticked in the bank statement into the cash book. These items (like bank charges or direct debits) should be recorded to correct the business's own ledger. Then, calculate the new cash book balance.
3. Prepare the Reconciliation Statement: Start with the final balance shown on the bank statement and adjust it for any items that remain unticked in the cash book (which are typically the timing differences like unpresented cheques or outstanding lodgements).

The result of this final step should equal the calculated new cash book balance.

Uses and Importance of Reconciliation

Preparing a bank reconciliation statement is an important system of control within the business. Its uses include:

• Determining Correct Cash Balance: They reveal the correct amount of cash at the bank, as the uncorrected balances can be misleading.
• Financial Reporting Accuracy: They ensure that the correct bank balance is shown in the statement of financial position (SFP).
• Internal Control/Fraud Prevention: If the reconciliation is prepared by someone other than the cashier, the risk of fraud or embezzlement is reduced (known as internal check). External auditors rely on this internal check method to verify financial data accuracy.
• Cash Management: They help avoid unintended overdrawing and highlight any surplus cash available for investment, especially if prepared regularly.

Presentation in the Statement of Financial Position (SFP)

The final balance calculated in the cash book after adjustment (Step 2) is the correct figure used in the statement of financial position.

• If the final cash book balance is a debit balance, it is shown under current assets as 'cash and cash equivalents' (along with cash in hand).
• If the final cash book balance is a credit balance, it appears under current liabilities as a 'bank overdraft'.