What is bank reconciliation statement?
During my stay at the financial control department of my PPA, I carried out a full reconciliation of our account. It wasn’t hard because it is something we did at our undergraduate level. Before I begin with how to carry out bank reconciliation, let’s start with the basics of what a bank reconciliation statement is. Due to the entity concept in accounting, we take the business as separate from the owner. In this respect, a business normally operates and own bank accounts which are different from the bank accounts of the owners.
Though a business has the liberty to choose between a savings account and a current account, they mostly opt for the latter. This is because a current account avails the business the opportunity of obtaining an overdraft in case the business needs immediate working capital, and more importantly they are designed for high volume transactions peculiar to businesses, and their mode of payment is either by personal withdrawal over the counter (or ATM), or presentation of cheques. Savings account does not allow the issuing of cheques like the current accounts, and this is a very important factor because businesses need to settle their numerous amounts of suppliers and creditors.
An advantage a savings account has over a current account is that up to date information and transactions are readily provided, while for a current account, balances are usually unknown due to the volume of transactions and the frequency of operating the account. For this reason, a business needs to perform a monthly bank reconciliation to align the cash book balance with the bank balance.
Bank reconciliation cannot be performed without a bank statement. What then is a bank statement? A bank statement is a source document that shows the details of receipts and payments on an account, including also the beginning balance and ending balance for a specified period of time. The bank statement could be sent in hard copy (physical papers) or electronically (password protected pdf files). On receipt of the bank statement, the business can then go ahead to compare transactions in the bank statement with those recorded on the cash book. To compare transactions, we compare the items on the payment side of the cash book (credit side) would be compared with items on the payment side of the bank statement (debit side). Also, items on the receipt side of the cash book (debit side) would be compared with items on the receipt side of the bank statement (credit side)
Please remember that in the cash book, any transaction that is a payment is (credited) to the cash book while any transaction that is a receipt is (debited) to the cash book.
Now let us look at some reasons why the balance in the bank statement may differ from the balance in the cash book. These problems can be grouped into problems caused by the records in the cash book and problems caused by the records in the bank statement.
Problems caused by records in the cash book
1) Correct entries in cash book only: These mostly deal with the timing of cheques. If a company issues or receives a cheque it is only natural that they immediately reflect it in their cash book; but due to some timing differences, the cheques may not have reflected in the bank statement of the business. If the entries are correctly recorded in the cash book as receipts but are not found in the bank statement such items are referred to as uncredited lodgements. An example is if you receive a check from a debtor on the 28th of April, and you go to the bank to lodge it in on the 29th, while your bank statement is sent to you on the morning of the 30th of April.
It is quite possible that the cheque you lodged in may not have reflected at the time the bank sends you your statement. So we take it as an uncredited lodgement. Treatment of transactions like this would be discussed later on. If the entries are already correctly recorded in the cash book as a payment but are not found in the bank statement as a payment, then we refer to such payments as unpresented cheques. An unpresented cheque is a cheque already issued to a creditor or supplier, and credited in the cash book, but has either not been presented by the supplier or has not reflected in the bank statement as at that time.
2) Wrong entries in the cash book only: These are typical mistakes made when recording transactions into the cash book. They include:
- Understatement or overstatement of balances in the cash book
- Error of original entry whereby an incorrect figure is entered into the records and posted to the wrong account in this case the cash account.
- Where the correct amount is posted to the wrong side of the cash book: for instance a receipt is posted to the credit side of the cash book.