For the reasons explained earlier, the balance on the account shown by the bank statement will rarely be the same as the current balance in the cash at bank account in the general ledger.
A bank statement is used to check that the general ledger account is not misstated in any way. This is done by checking the details on the bank statement and the details in the general ledger account, and making sure that they are in agreement with each other. If the balance in the bank statement and the balance in the general ledger account is different, this exercise involves checking the difference in the two balances, and making sure that the differences can be properly reconciled and explained.
Bank reconciliations are important because they are a check on the accuracy of the cash at bank general ledger account. In particular:
Why does a business reconcile its cash at bank general ledger account with the bank statement periodically?
A It is a legal requirement.
B It speeds up the posting of transactions to the general ledger accounts
C It is a control measure checking for errors and omissions.
D It enables the business to correct mistakes with the accurate bank records.
The cash at bank account balance in the general ledger is $165.40 in hand. Reference to the bank statement shows that a standing order of $10.00 to a supplier has not been recorded in the general ledger account but that every other item is the same in both the general ledger account and the bank statement. The omitted standing order is then recorded in the cash at bank general ledger account.
What are the balances shown in the cash at bank general ledger account and on the bank statement after updating has taken place?
A Cash at bank general ledger $155.40 Cr, Bank statement: $155.40 Dr
B Cash at bank general ledger $155.40 Dr, Bank statement: $155.40 Cr
C Cash at bank general ledger $175.40 Cr, Bank statement: $175.40 Dr
D Cash at bank general ledger $175.40 Dr, Bank statement: $175.40 Cr
For a suggested answer, see the 'Answers' section at the end of the book
The procedure to perform a bank reconciliation is explained and illustrated below. The procedure is then used in an illustrative example later in the chapter so you can see each stage of the procedure in action.
The opening balance on the bank statement and the opening balance in the cash at bank general ledger account should be agreed or reconciled. (The two opening balances may be different, for the same reasons that the two closing balances may be different!)
This is done by looking for receipts or payments during the period that explain the difference. For example, if the opening balance on the bank statement is $3,000 credit and the opening balance in the cash at bank general ledger account is $4,500 debit, the difference may be explained by a receipt (bank giro credit or BGC) for $1,500 during the period. This may be a receipt that was recorded in the cash at bank general ledger account in the previous period, but which was not processed and cleared by the bank until the current period. In other words, the difference in the two opening balances should be explained by 'timing differences' between when a payment or receipt was recorded in the cash at bank general ledger account and when the payment or receipt was processed by the bank.
Transactions that explain the difference between the two opening balances should be ticked on the bank statement to signify that they have been explained and matched in both documents.
Individual transactions in the cash at bank general ledger account should be matched with the same transactions on the bank statement. If there are matching transactions in the two documents, we can tick the items in both documents as being matched.
The difference in the two closing balances must be explained by transactions on the bank statement and transactions in the cash at bank general ledger account that have not yet been ticked (i.e. explained and matched).
There may be some receipts or payments shown in the bank statement that are not yet recorded in the cash at bank general ledger account. These items could be standing order payments, direct debit payments, BACS transactions or bank charges.
For standing orders and direct debits, the schedule of payments or receipts should be checked, to make sure that they have all been made as expected.
Update the cash at bank general ledger account to record all of these transactions on the date the reconciliation takes place. When items on the bank statement are entered in the cash at bank general ledger account, they should be ticked on the bank statement to show that they have been matched and dealt with.
After updating the cash at bank general ledger account, it will have an amended balance, but it may still differ from the balance on the bank statement. There may be some items recorded in the general ledger account that have not yet been ticked because they do not appear on the bank statement.
These items will be:
Outstanding lodgements and unpresented cheques should explain the difference between the updated cash at bank general ledger account balance and the bank statement balance. These transactions should appear on the next bank statement, and will be used to reconcile the two opening balances when the next bank reconciliation is performed.
Prepare the bank reconciliation statement. This is a simple statement that sets out the reasons for the differences between the two closing balances.
Bank reconciliation statement as at [date]
| $ | $ | |
| Closing balance per the bank statement | 3,451.00 | |
| Unpresented cheques | ||
| Cheque 13578 | 45.00 | |
| Cheque 13580 | 291.00 | |
| Cheque 13583 | 138.00 | (474.00) |
| Outstanding lodgements | ||
| Receipt VBF Limited | 2,977.00 | |
| Receipt S Dowding | 200.00 | |
| 37.00 | 237.00 | |
| Closing balance per the cash at bank general ledger account | 3,214.00 |
Study this sample reconciliation carefully to ensure that you understand why unpresented cheques have been subtracted and outstanding lodgements have been added.
Unpresented cheques are payments recorded in the general ledger account but not yet on the bank statement. This balance will therefore be lower than the bank statement balance, by the amount of these payments.
Outstanding lodgements are receipts recorded in the general ledger account but not yet on the bank statement. This balance will therefore be higher than the bank statement balance, by the amount of these receipts.
The following example is quite long, but try to follow the procedure carefully to perform the bank reconciliation. It uses a typical computerised accounts format for the cash at bank general ledger account.
Shown below is the cash at bank general ledger account of Bradley Trading for the week ended 31 May 20X5, together with the bank statement at 31 May 20X5. You are also given a bank reconciliation statement for the week ended 24 May 20X5, and details of bank paying-in slips for the week.
Cash at bank general ledger account
| Date | Details | Reference/ Cheque number | Receipts Debit | Payments Credit | Balance $ |
|---|---|---|---|---|---|
| 20X5 | $ | $ | $ | ||
| May | Opening balance | 6,194.33 | |||
| 27 | Cumnor Ltd | 76.93 | 6,271.26 | ||
| 27 | Holmes & Sons | 119.11 | 6,390.37 | ||
| 27 | Cash sales | 490.68 | 6,881.05 | ||
| 27 | Skipper Ltd | 12791 | 44.80 | 6,836.25 | |
| 27 | Wessex Water | SO | 294.00 | 6,542.25 | |
| 27 | Hill & Co | 12792 | 117.23 | 6,425.02 | |
| 27 | GW Rail | 12793 | 87.00 | 6,338.02 | |
| 28 | Wood House | 29.48 | 6,367.50 | ||
| 28 | Cash sales | 251.09 | 6,618.59 | ||
| 28 | WR Smith | 12794 | 32.89 | 6,585.70 | |
| 28 | Binder & Sons | 12795 | 918.20 | 5,667.50 | |
| 29 | Cash sales | 365.70 | 6,033.20 | ||
| 29 | Wills Insurance | DD | 750.00 | 5,283.20 | |
| 29 | GW Rail | 12796 | 111.00 | 5,172.20 | |
| 29 | Shatter & Co | 12797 | 98.60 | 5,073.60 | |
| 30 | Temple & Co | 48.60 | 5,122.20 | ||
| 30 | Grove Ltd | 194.20 | 5,316.40 | ||
| 30 | Cash sales | 208.45 | 5,524.85 | ||
| 30 | PW Resistor | 12798 | 59.21 | 5,465.64 | |
| 30 | Proffice | 12799 | 115.34 | 5,350.30 | |
| 31 | Cash sales | 441.92 | 5,792.22 | ||
| 31 | Scroll & Sons | 12800 | 643.12 | 5,149.10 | |
| 31 | GW Rail | 12801 | 17.90 | 5,131.20 | |
| 31 | Trapp Garage | 12802 | 33.23 | 5,097.97 |
Statement of Account
NATIONAL WESTERN BANK
66 The Long Way, Bristol BS2 4NY
Account number 17742001
Sheet number 27
| Date | Details | Payments | Receipts | Balance |
|---|---|---|---|---|
| 20X5 | $ | $ | $ | |
| 27 May | Balance b/f | 6,347.33 | ||
| 27 May | SO: Wessex Water | 294.00 | 6,053.33 | |
| 28 May | 12790 | 153.00 | 5,900.33 | |
| 29 May | Wills Insurance | 750.00 | 5,150.33 | |
| 30 May | 3729: CC | 686.72 | 5,792.25 | |
| 30 May | 12791 | 44.80 | 5,747.45 | |
| 31 May | 3730: CC | 280.57 | 6,028.02 | |
| 31 May | 12793 | 87.00 | 5,941.02 | |
| 31 May | Bank charges | 14.00 | 5,927.02 | |
| SO standing order, DD direct debit, CC cash and/or cheques, O/D Overdrawn | ||||
Bank reconciliation statement for the week ended 24 May 20X5
| $ | |
| Balance as per bank statement | 6,347.33 |
| Unpresented cheques: | |
| 12790 | (153.00) |
| Balance as per cash at bank general ledger | 6,194.33 |
Paying-in slip details
27 May 20X5
| Cheques: | |
| Cumnor Ltd | 76.93 |
| Holmes & Sons | 119.11 |
| Cash sales | 196.04 |
| Cash sales | 490.68 |
| Total | 686.72 |
28 May 20X5
| Cheques: | |
| Wood House | 29.48 |
| Cash sales | 251.09 |
| Total | 280.57 |
29 May 20X5
| Cash sales | $ 365.70 |
30 May 20X5
| Cheques: | |
| Temple & Co | 48.60 |
| Grove Ltd | 194.20 |
| Cash sales | 242.80 |
| Cash sales | 208.45 |
| Total | 451.25 |
31 May 20X5
| Cash sales | $ 441.92 |
Required:
Task 1
Compare the entries in the two documents, ticking off each item in turn as it is correctly matched.
Task 2
Update the cash at bank general ledger account to include the transactions shown on the bank statement that are not yet in the general ledger account.
Task 3
Calculate the closing balance on the cash at bank general ledger account as at 31 May.
Task 4
Prepare a bank reconciliation statement as at 31 May.
Tasks 1, 2 and 3
First of all, reconcile the opening balance on the bank statement with the opening balance in the general ledger account. We know from the previous week's bank statement that the difference was due to an unpresented cheque, number 12790. This is shown in the bank statement for the current week, so we can tick off this item on the bank statement.
Next we need to match and tick off the corresponding transactions during the week that appear in both the general ledger account and the bank statement. Here, the receipts need to be checked first of all by comparing the paying in slips with the bank statement, and then identifying the receipts in the general ledger account.
The only item on the bank statement that is not in the general ledger account is $14 for bank charges. This should be recorded in the general ledger account. The general ledger entries to record bank charges will be: Debit Bank charges, and Credit Cash at bank.
Having entered the bank charges, the cash at bank ledger account can be balanced off
Statement of Account
NATIONAL WESTERN BANK
66 The Long Way, Bristol BS2 4NY
Account number 17742001
Sheet number 27
| Date | Details | Payments | Receipts | Balance |
|---|---|---|---|---|
| 20X5 | $ | $ | $ | |
| 27 May | Balance b/fwd | 6,347.33 | ||
| 27 May | SO: Wessex Water | 294.00 | 6,063.33 | |
| 28 May | 12790 | 153.00 | 5,900.33 | |
| 29 May | Wills Insurance | 750.00 | 5,150.33 | |
| 30 May | 3729: CC | 686.72 | 5,792.25 | |
| 30 May | 12791 | 44.80 | 5,747.45 | |
| 31 May | 3730: CC | 280.57 | 6,028.02 | |
| 31 May | 12793 | 87.00 | 5,941.02 | |
| 31 May | Bank charges | 14.00 | 5,927.02 | |
| SO standing order, DD direct debit, CC cash and/or cheques, O/D Overdrawn | ||||
Paying-in slip details
27 May 20X5
Cheques:
Cumnor Ltd 76.93
Holmes & Sons 119.11
Cash sales 196.04
Cash sales 490.68
Total 686.72
28 May 20X5
Cheques:
Wood House 29.48
Cash sales 251.09
Total 280.57
29 May 20X5
Cash sales $ 365.70
30 May 20X5
Cheques:
Temple & Co 48.60
Grove Ltd 194.20
Cash sales 242.80
Cash sales 208.45
Total 451.25
31 May 20X5
Cash sales $ 441.92
Cash at bank general ledger account
| Date | Details | Reference/ Cheque number | Receipts Debit | Payments Credit | Balance $ |
|---|---|---|---|---|---|
| 20X5 | $ | $ | $ | ||
| May | Opening balance | 6,194.33 | |||
| 27 | Cumnor Ltd | 76.93 | 6,271.26 | ||
| 27 | Holmes & Sons | 119.11 | 6,390.37 | ||
| 27 | Cash sales | 490.68 | 6,881.05 | ||
| 27 | Skipper Ltd | 12791 | 44.80 | 6,836.25 | |
| 27 | Wessex Water | SO | 294.00 | 6,542.25 | |
| 27 | Hill & Co | 12792 | 117.23 | 6,425.02 | |
| 27 | GW Rail | 12793 | 87.00 | 6,338.02 | |
| 28 | Wood House | 29.48 | 6,367.50 | ||
| 28 | Cash sales | 251.09 | 6,618.59 | ||
| 28 | WR Smith | 12794 | 32.89 | 6,585.70 | |
| 28 | Binder & Sons | 12795 | 918.20 | 5,667.50 | |
| 29 | Cash sales | 365.70 | 6,033.20 | ||
| 29 | Wills Insurance | DD | 750.00 | 5,283.20 | |
| 29 | GW Rail | 12796 | 111.00 | 5,172.20 | |
| 29 | Shatter & Co | 12797 | 98.60 | 5,073.60 | |
| 30 | Temple & Co | 48.60 | 5,122.20 | ||
| 30 | Grove Ltd | 194.20 | 5,316.40 | ||
| 30 | Cash sales | 208.45 | 5,524.85 | ||
| 30 | PW Resistor | 12798 | 59.21 | 5,465.64 | |
| 30 | Proffice | 12799 | 115.34 | 5,350.30 | |
| 31 | Cash sales | 441.92 | 5,792.22 | ||
| 31 | Scroll & Sons | 12800 | 643.12 | 5,149.10 | |
| 31 | GW Rail | 12801 | 17.90 | 5,131.20 | |
| 31 | Trapp Garage | 12802 | 33.23 | 5,097.97 | |
| 31 | Bank charges | 14.00 | 5,083.97 | ||
| Column totals | 8,420.49 | 3,336.52 | |||
Task 4
Bank reconciliation statement for the week ended 31 May 20X5
| $ | $ | |
| Balance as per bank statement | 5,927.02 | |
| Unpresented cheques: | ||
| 12792 | 117.23 | |
| 12794 | 32.89 | |
| 12795 | 918.20 | |
| 12796 | 111.00 | |
| 12797 | 98.60 | |
| 12798 | 59.21 | |
| 12799 | 115.34 | |
| 12800 | 643.12 | |
| 12801 | 17.90 | |
| 12802 | 33.23 | (2,146.72) |
| Outstanding lodgements: | ||
| 29 May | 365.70 | |
| 30 May | 451.25 | |
| 31 May | 441.92 | 1,258.87 |
| Balance as per cash at bank general ledger account | 5,083.97 |
RECONCILIATIONS CHAPTER 13