Maintaining and Reconciling Bank and Cash Accounts
Two records, one truth
The cash book (or cash receipts and payments records) is the entity's record; the bank statement is the bank's record. They differ because of timing and errors. A bank reconciliation explains the difference and proves the adjusted cash book balance equals the adjusted bank statement balance.
Typical reconciling items
- Deposits in transit (outstanding deposits): recorded in the cash book, not yet on the statement - add to the bank statement balance.
- Unpresented (outstanding) cheques: recorded in the cash book, not yet cleared - deduct from the bank statement balance.
- Bank charges, interest, direct credits, standing orders, dishonoured cheques: on the statement but not yet in the cash book - adjust the cash book.
- Errors: determine which record is wrong before adjusting.
Traps to watch for
- Direction errors: adding unpresented cheques instead of deducting them.
- Adjusting the wrong record: bank charges and direct credits are cash book adjustments, not statement adjustments.
- Sign confusion on overdrafts: a credit balance on the statement is favourable to the customer; a debit balance is an overdraft.
- Petty cash imprest system: reimbursements restore the float to its fixed amount; expenses are only recorded when the float is reimbursed.
Worked example
Bank statement shows ₱30,000 credit. Deposits in transit ₱5,000; unpresented cheques ₱7,000. Adjusted bank balance = 30,000 + 5,000 − 7,000 = ₱28,000. If the cash book shows ₱26,500, there are ₱1,500 of unrecorded credits (e.g., a customer direct deposit) needing cash book adjustment. Rule of thumb: items already in the cash book adjust the bank side; items only on the statement adjust the cash book.