Reconciling Bank Statements
The idea
The cash book is the business's record; the bank statement is the bank's record. They differ because of timing and errors. Reconciling proves the two records agree and is a key detective control over cash.
Adjust the cash book first
Items on the statement not yet in the cash book include bank charges, interest received or paid, dishonoured cheques, and standing orders or direct debits paid by the bank. Enter these in the cash book, then calculate the updated (adjusted) cash book balance.
Then reconcile
Start with the balance per bank statement, add lodgements or deposits not yet credited, deduct unpresented cheques, and arrive at the adjusted cash book balance. Alternatively start with the cash book and reverse the timing items. The reconciliation statement explains timing differences; the cash book adjustment records items the business had not yet entered.
Traps
Do not put bank charges into the reconciliation statement after you have already adjusted the cash book - that double-counts them. Watch debit/credit direction: a credit balance on the bank statement is a positive bank balance (an asset), while a debit balance is an overdraft. Unpresented cheques are deducted from the statement balance. Stale cheques may need writing back. Do not adjust the cash book for unpresented cheques; they are timing items only.
Worked example
Statement £5,000 credit; lodgements not credited £400; unpresented cheques £700; bank charges £50 not in the cash book. The cash book is reduced by £50. Reconciliation: £5,000 + £400 − £700 = £4,700, which equals the adjusted cash book balance.
Rule of thumb
Statement balance + lodgements not credited − unpresented cheques = adjusted cash book balance.