Banking Systems and Bank Reconciliation
Banking systems
A standing order is an instruction from the payer to their bank to pay a fixed amount regularly; a direct debit is an authority given to the payee to collect varying amounts. BACS handles bulk payments on a three-day cycle, Faster Payments are near-instant, and CHAPS is used for same-day high-value transfers. Cheques, paying-in slips and bank giro credits still appear in questions.
Bank reconciliation
Reconciliation explains why the cash book bank balance differs from the bank statement balance. Work in two stages. First, update the cash book for items the bank already knows about but which have not yet been entered: bank charges and interest, standing orders and direct debits, direct credits from customers, dishonoured cheques and errors made by the bank. Second, prepare the reconciliation statement for timing differences - lodgements not yet credited and unpresented cheques - using: statement balance + lodgements not credited − unpresented cheques = adjusted cash book balance.
Traps
- Timing differences go in the reconciliation statement, never in the cash book.
- A credit balance on the bank statement means the business has money in the account; an overdraft appears as a debit balance on the statement.
- A dishonoured cheque is reversed out of the cash book, not added to it.
Worked example
Cash book shows £1,250 debit. Bank charges of £30 not yet recorded give an adjusted balance of £1,220. With unpresented cheques of £180 and lodgements of £300 not yet credited, the statement balance is £1,220 + £180 − £300 = £1,100.