This content was covered in more detad in an aartier chapter but it will be useful to have a best recap before moving on to dealing with bank fecondations
A business vzes the bank general tedger account to record every receipt and payment that prenos through its bank account in theory, the balance on the bank general techger account should be the same as the balance as per the bank's record of the bank accouni as documented by the bank statement in practice, however, this is not always the case and the two records need to be reconciled to ensure that there are no errons or omissions
There are several reasons for differences between the bank general ledger account and the bank statement which are explained below However, do remember that with the use of modern technology, many of the differences which may arise between the cash al bank general ledger account and the bank statement are perhaps lesa significant than they used to be as receipts and payments are now processed much quicker than they used to be
With cheques and credit transfers, there are tuning differences between recording the receipt or payment in the bank general ledger account and the transfer of cash into or out of the bank account
When a business pays a supplier by chaque. The payment will be recorded in the bank general ledger account and the cheque issued to the supplier. The supplier should receive the cheque through the post a day or so later, but may not pay the cheque into their bank immediately. When the cheque is paid in, the transfer of money from the payer's bank account to the payee's bank account does not happen instantly. There is a further delay, perhaps of two or three days, due to the time it takes for the cheque payment to be 'cleared through the banking system a week or more from the recording of a cheque payment in the business's general ledger account to appear on the bank statement Thus, it could take
Similarly, when a business receives a payment by cheque, it should record the receipt in the bank general ledger account, and it is good business practice to pay the cheque into the bank as soon as possible (ideally, on the same day). Even so, the lodging of cheques into the bank account will take two or three days, due to the 'clearing delay and so there will be a further difference between the business's record and the bank statement
When a customer pays by cheque, the payer's bank may refuse to honour it. When a cheque bounces', it is retumed with a message 'refer to drawer', but it can take a few days before this happens. As far as the business is concerned, payment has been received from the customer and entered in the bank general ledger account. When it discovers that the cheque has been returned and/or dishonoured, it will have to reflect this in the bank general ledger account. In the meantime, both the bank and the business will have different balances due to the timing of the recording of the dishonoured cheque.
A similar delay occurs when payments are received from customers by credit transfer.
A business may record the transactions in its bank general ledger account on the dates that the payments are due. However, if it does this, it will need to check that the cash has actually been received into its bank account. A customer may, for example. cancel a standing order payment. When this occurs, the entry of a cash receipt in the bank general ledger account would be wrong. A business may therefore wait for confirmation from the bank that the direct debits and standing order transactions have been processed by the bank before recording them in the bank general ledger account.
A business that makes payments by standing order may record the payments in the bank general ledger account on the due payment dates. (The details of the payments can be obtained from the schedule the business should maintain.) When a business makes payments by direct debit, however, the amount of the payment can vary. For example, if telephone bills are paid by direct debit, the amount payable each time will depend on usage of the telephone during the billing period. Direct debit payments cannot therefore be recorded in the bank general ledger account until the notification from the supplier or the bank of the amount paid has been received.
Increasingly, businesses may pay and receive funds electronically, say through BACS. Receipts are particularly difficult to predict as to when they will arrive in the bank account. A business may wait for confirmation from the bank that such transactions have taken place before recording them in the general ledger.
Individuals may not pay any bank charges on personal accounts provided they keep their account 'in credit'. For a business bank account, however, a bank usually makes charges for its services. Bank charges are deducted from the account balance, and notified to the business on the next bank statement. Until it receives a bank statement, the business does not know how much the bank charges are and so cannot record them in the bank general ledger account. Bank charges are recorded as a cash payment in the bank general ledger account when the bank statement is received. The same is true of bank interest paid for, say, loans and overdrafts.
Similarly, if a business has a deposit or savings account and received interest on this bank account, the amount of interest receivable is not known, and so cannot be recorded, until after a bank statement has been received.
RECONCILIATIONS CHAPTER 13