What it proves
The Institute of Certified Bookkeepers defines a bank reconciliation statement as one that reconciles, at a point in time, the balance in the cash book with the balance on the bank statement (ICB). ACCA's Financial Accounting syllabus expects students to explain the main reasons for differences between the bank account in the ledger and the bank statement, correct errors in the ledger account and identify the bank balance to report in the financial statements (ACCA FA study guide).
The balance sheet shows the bank balance from the books. Payments not yet cleared and receipts not yet credited are timing differences that the reconciliation explains. Anything else is an error or an omission to fix in the books.
Differences a reconciliation finds
- Payments in the books not yet on the statement, such as cheques not yet presented and payments made on the last day of the month.
- Receipts in the books not yet on the statement, such as takings banked after the bank's cut-off.
- Items on the statement not yet in the books, such as bank charges, interest, direct debits, standing orders and card fees.
- Errors in the books: a transposed figure, an entry posted twice, a payment coded to the wrong bank account.
- Bank errors, which are raised with the bank when found.
A worked month-end reconciliation
| Amount £ | Note | |
|---|---|---|
| Balance per bank statement | 8,420 | From the statement |
| Add: receipt banked on the last day, credited the next day | 1,150 | Timing, no entry needed |
| Less: supplier payment made near the month end, cleared after it | (2,300) | Timing, no entry needed |
| Adjusted bank balance | 7,270 | Should equal the corrected books |
| Balance per books before corrections | 7,320 | From the cash book |
| Less: March bank charges not yet entered | (35) | Post to bank charges |
| Less: direct debit for insurance not entered | (15) | Post to insurance |
| Corrected balance per books | 7,270 | Agrees to the adjusted bank balance |
The figures are illustrative. The statement shows 8,420. Adding the receipt the bank had not yet credited and taking off the payment it had not yet cleared gives 7,270. The cash book showed 7,320 before the bookkeeper posted the bank charges and the direct debit that were on the statement but not in the books. After those two entries the books show 7,270 and the difference is nil. The two timing items are listed on the reconciliation and should clear on the next statement.
Reconciling an account
Start from the last reconciled position
Check the opening balance agrees to the closing balance of the last reconciliation, and that the items left outstanding then have cleared.
Bring the books up to date
Post every line on the statement that is missing from the books: charges, interest, direct debits, receipts and transfers.
Tick each matching entry
Tick each entry in the books that appears on the statement, by date and amount.
List what remains
The unticked entries in the books are the timing differences. Each should be explainable and recent.
Agree the difference to nil
The statement balance plus outstanding receipts, less outstanding payments, equals the balance in the books.
Keep the report
File the reconciliation with the statement. Old unreconciled items are investigated: a cheque several months old may be stale or cancelled, and a receipt that never cleared may have been lost.
Questions
How often should a bank account be reconciled?
As often as the books are used. A VAT-registered client is reconciled at least to each VAT period end before the return is prepared, and every account is reconciled to the year end before the accounts. Monthly reconciliation keeps differences small and recent.
Does a credit card or loan account need reconciling?
Yes. Credit cards, loans, savings accounts, payment processors and petty cash are all balance sheet accounts with an outside statement or count to agree to, and each is reconciled the same way.
What if the difference cannot be found?
Check for a figure transposed (a transposition always leaves a difference divisible by 9), an entry posted twice, an amount entered on the wrong side, or an item from another bank account. An unexplained difference posted to a suspense account is a holding entry and must be cleared before the accounts are finalised.
In Accountin
In Accountin you reconcile a bank, cash or card account by entering the statement balance and ticking entries, or ticking from the imported statement, and the reconciled report lists what was not yet on the statement.
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