Bank Reconciliation and Control Accounts
Two different tools
A bank reconciliation compares the business's cash book with the bank statement. A control account summarises the total of the sales or purchases ledger and is checked against the list of balances.
Bank reconciliation
Update the cash book first for items the business did not know about:
- Bank charges, interest, standing orders and direct debits – reduce the cash book.
- Dividends or receipts paid directly into the bank – increase the cash book.
- Dishonoured cheques – reverse the original entry.
Then reconcile the updated cash book balance to the bank statement using items the bank does not yet know about: unpresented cheques and outstanding lodgements.
Traps
- Adjusting the bank statement for unpresented cheques. You never alter the statement; you adjust the reconciliation.
- Putting bank charges through the reconciliation instead of the cash book.
- Confusing a credit balance in the cash book (overdraft) with a credit balance on the statement (money in the bank).
Control accounts
Sales ledger control: opening debit balances + credit sales − returns inwards − receipts − discounts allowed − bad debts = closing debit balances. Purchases ledger control works in mirror image. Differences may come from casting errors, omitted entries, or a balance wrongly listed.
Rule of thumb
Items the business did not know go in the cash book; items the bank did not know go in the reconciliation.