Bank and Cash Reconciliations
This domain tests reconciliation of the cash book with the bank statement, including adjustments to the cash book and timing differences in the reconciliation statement. Exam questions often require an adjusted cash book balance and a bank reconciliation.
Core rules
- The cash book is the entity's record; the bank statement is the bank's record.
- Items recorded by the bank but not the entity adjust the cash book: bank charges, interest, standing orders, direct debits, dishonoured cheques and bank errors.
- Items recorded by the entity but not yet by the bank appear in the reconciliation: outstanding cheques and deposits in transit.
- Adjusted cash book balance plus outstanding cheques less deposits in transit equals the bank statement balance, for a positive bank balance.
- An overdraft is a credit balance in the cash book and requires careful sign treatment.
Worked example
Cash book shows a debit balance of 4,500. Bank charges of 100 appear only on the statement. Adjusted cash book = 4,400. Outstanding cheques are 600; deposits in transit are 300. Balance per bank statement = 4,400 + 600 - 300 = 4,700. Reconciliation: balance per bank 4,700; add deposits in transit 300 = 5,000; less outstanding cheques 600 = 4,400, agreeing to the adjusted cash book. The charges are entered in the cash book, not left in the reconciliation.
Traps
- Putting bank charges in the reconciliation instead of the cash book.
- Adding outstanding cheques when they should be deducted.
- Treating an overdraft as a positive balance.
- Forgetting to adjust for dishonoured cheques.