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Bank Reconciliation

Bank reconciliation is the process of reconciling cash book to bank statement by comparing the entries in the bank account in the cash book and on the bank statement. Every company has one or more bank accounts, and receives a bank statement for each account it has. The bank statement is a copy of the company’s account as kept at the bank. The statement shows a list of all financial transactions that take place over a period of time, usually a month using the account.

Entries on the debit side of the company’s cash book appear on the credit side of the bank statement, and items on the credit side in the cash book are recorded on the debit side on the bank statement. This is because the cash account is a debit account in the company’s books. To the bank, the company’s account is a creditor’s account. A cash deposit is debited in the cash book as it increases the asset of cash while a payment is credited as it reduces the cash balance. From the bank’s point of view, a cash deposit into the company’s account is an increase in the creditor’s balance and so it’s credited. A cheque issued by the company is debited in the account by the bank as it decreases the credit balance which is the amount owed by the bank.

The cash balance shown on the bank statement must equal the bank balance in the company’s cash book. If all the transactions were recorded in the cash book and on the bank account within the same period, then surely the balances would agree. But they rarely do. A bank reconciliation statement is therefore prepared to reconcile the two by identifying the causes of the difference.

The items that usually cause the difference are deposited cheques that are still not credited, and cheques issued but not yet presented to the bank, and service and other miscellaneous bank charges that are not known and so not recorded in the cash book until the bank statement is received. Sometimes, other unanticipated entries on the bank statement or omission of an entry in the cash book can cause the difference between the two balances

Items that are recorded in the cash books often do not appear on the bank statement. Deposits made into the bank account and cheques issued are usually recorded in the cash book without delay. But they are done close to the end of the month giving the bank insufficient time to record them in the same month. They thus appear on the following month’s bank statement.

Bank reconciliation is necessary to confirm that the closing cash balance is correct for it to appear on the company’s financial statements. It is a necessary process of managing a company’s cash resources.

1 Preparing a bank reconciliation statement
2 Items on bank reconciliation statement
3 Returned / Dishonoured Cheques