Concept of bank reconciliation statement
A business enterprise will record money paid into the bank and the sums drawn from the bank with cheques in the cash book. On the other hand the bank record all the transactions in its own book. The book which the bank prepares showing the transaction between it and the customer is known as “bank statement”as a matter of necessity,the balances of the cash book and the bank statement must be equal.
When there is a difference between the cash book balance and the bank statement balance,then there is need for reconciliation.
Bank reconciliation statement is therefore defined as a statement that is prepared to reconcile the disagreement of the cash book and that of the bank statement. The reconciliation is necessary in order to test the accuracy of the posting in the cash by reconciling the balance of the cash book with that of the bank statement.
Reasons for disagreement between the cash book and bank statement
- Unpresented cheque: These are cheques drawn or issued out in favour of somebody but have not been drawn from the bank at the time of preparation of the bank statement. The cheque can be delayed for months if the recipients fail to pay them in, the firm had credited the cash book with the cheque issued out,thereby reducing the balance of the cash book but it had not been debited to the bank statement, so the balance of the bank statement remain the same. The effect of this is that the balance of the cash book will be less than the balance of the bank statement. To correct this,amount due on unpresented cheque must be added back to the cash book balance
- Uncredited cheque: These are cheques received and entered on the debit side of the cash book but have not been entered in the bank statement due to lateness or the bank statement had been prepared before the cheque were paid in, the effect of this is that the cash book will show a balance that will be more than the balance of the bank statement. To correct this the uncredited cheque must be deducted from the balance of the cash book.
- Dividend: this is the part of the profit for shares held by the customer to the bank paid directly into his bank account.the effect of this is that the bank balance will be more than the cash book balance.therefore to correct this error the amount of dividend must be added back to the balance in the cash book.
- Standing order: this is an order made by the customer to the bank to make regular payment to somebody e.g hire purchase installments.the effect of this is that the bank balance will be less than the cash book balance.this is corrected by deducting the amount due to the cash book.
- Dishonoured cheque: These are cheques received from customers and paid in by the firm,but were rejected by the bank as a result of wrong signatures,incorrect amount etc. the dishonoured cheques have not been reflected in the cash book.the effect of this is that the balance of the bank statement will be less than the cash book balance. To correct this the amount on the cheque must be deducted from the cash book.
- Credit transfer: these are the payment made by customer of the firm,directly into their bank account without the awareness of the firm.the effect of this is that the bank balance will more than the cash book balance.to correct this the amount will be added to the cash book.
- Bank charges and interest: this is the amount deducted by the bank for services rendered.the bank will deduct the charges without informing the firm until they receive the bank statement, the effect 0of this is that the bank balance will be less than the cash book balance.to correct this the amount should be deducted from the cash book balance.
- Direct debit: this is an arrangement whereby a person account is debited with a sum of money at the instance of the supplier with the account owners prior permission.the effect of this is that the bank balance will be less than the cash book balance.to correct this error amount due will be deducted from the cash book
- Errors by the bank: bank can make mistakes,a sum oaid by the customer may be credited to another customers account.
- Undercasting or overcastting of the cash book balance:other errors like undercasting or overcastting of the cash book balance drought down or the overcastting or undercasting of the payments or receipt by the cashier will also cause disagreement between the bank statement and the cash book.the effect and corrections will depend on the error.
Having analyzed the reasons for disagreement above,the chart below is designed to ensure proper understanding.
| Causes of differences | Effect on cash book | Effect on bank statement cash book balance | Correction starting with cash balances | Correction starting with bank statement |
| 1. Uncredited cheque | Greater balance | Lower balance | subtract | Add |
| 2. Unpresented cheque | Lower balance | Greater balance | Add | Subtract |
| 3. Bank chargers | Greater balance | Lower balance | subtract | Add |
| 4. Standing order | Greater balance | Lower balance | substract | add |
| 5. Credit transfer | Lower balance | greater balance | Add | Subtract |
| 6. Dividend | Lower balance | Greater balance | Add | subtract |
| 7. Dishounred cheque | Greater balance | Lower balance | Subtract | Add |
| 8. Direct debit supplier | Greater balance | Lower balance | Subtract | Add |
| 9. Undercasting of receipt side of cash book | Lower balance | Greater balance | Add | Subtract |
| 10. Overcastting of receipt side of the cash. | Greater balance | Lower balance | Subtract | Add |
