Bank Reconciliations

Introduction:
Individuals and entities conduct their transactions via a bank. The key components of a Bank
include deposits and withdrawals. Businesses maintain their own records of transactions via cash
book and Banks record all the transactions in their system and periodically issue bank statements
to their customers. At any given point of time these 2 should match, but due to timing difference
in recording the transactions, at time bank statement and cash book balances may not tally. But
upon careful scrutiny we can know the reasons.

The bank columns of the cashbook records money paid out and received by the business bank
account. Both the bank and business concerned should have identical records of these
transactions since both records refer to the same transactions. The bank will regularly send to the
business concerned a copy of its related transactions. This is called a bank statement.
The business will check its cash book bank entries against the entries in the bank statement. The
differences found many times are due to:
-Genuine recording errors
-Fraud
-The difference in time when the entries to the cashbook of the business and the bank’s records
are made; most of the time it is due to this third factor.

Meaning: A bank reconciliation statement is a statement that compares the cash book and the
bank statement. It provides the differences between the two.

Items which may cause a time difference in making entries to the cash book and the bank’s
records
Un-presented Cheques
These are cheques paid out and recorded by the business but have not been received by the bank
for payment. Un-presented cheques will therefore be found on the payment side of the cashbook
but not on the bank statement.
Late Lodgments
These are cheques received and recorded in the cashbook by the business which have not been
lodged, or were lodged late, so were not entered on the bank statement. Late Lodgments will be
found on the receipts side of the cashbook but not on the bank statement.
Standing Orders
A business may instruct its bank to make regular payments to stated entities on its behalf. These
would have been entered on the bank’s records first and would therefore be found on the
payment side of the bank statement but not in the cash book of the business.
Direct Debits
These represent payments where the creditor is given permission to withdraw the payments
directly from business bank account. These would first be recorded by the bank. Direct Debits
are found on the payment side of the bank statement but not in the cash book.
Bank Charges
These represent payments of the business for some services provided by the bank. These
payments would automatically be withdrawn from the business account by the bank so would
first be on the bank’s records. Bank Charges would be found on the payment side of the bank
statement but not in the cash book.
Credit Transfers
These represent funds transferred to the business bank account from another account through the
banking system. This would first be entered on the bank’s records. Credit Transfers are found on
the receipts side of the bank statement but not in the cash book.
Dishonored Cheques
If a cheque is received by the business and lodged to the bank but later discovered by the bank to
have some irregularity, the bank will not accept the cheque. This dishonored cheque would first
be recorded by the bank. Dishonored cheques will be found on the payment side of the bank
statement but not in cashbook of the business.