Bank Reconciliation Businesses keep track of their money in the bank by completing a Cash Receipts Journal, a Cash Payments Journal and then posting these to the Bank account in the General Ledger. Similarly, the bank keeps track of all the money transactions with each business. The Bank’s version of what has happened will be a mirror- image of the business’s version. i.e. it will be the opposite. This is because to the business, money in the bank is an asset, whereas to the bank, the business is a creditor to whom they owe money.

The bank account in the ledger and the current account at the bank Therefore when the bank says we have a credit balance, it means we have money in the bank, but if the bank says we have a debit balance, then we are in overdraft. Every time we put money into the bank we will enter this in the CRJ and thus debit the bank account, while the bank will credit our account. (and vica versa)

Bank Statements Banks keep a separate account for every person and every business who has an account with them. At the end of each month they send a copy of these accounts to each of their customers. This copy is called a bank statement.

Example of a Bank Statement

The bank account in the ledger and the bank balance at the Bank One would think that the balance which appear in the bank statement at the end of the month would be the same as the balance in the businesses bank account in the General Ledger. However this is almost never the case! WHY?

The bank account in the ledger and the bank balance at the Bank The reason for this is time and information. The bank will always have information that the business is unaware of as yet (such as how much has been charged by the bank for bank charges for the month). There will be information which the business knows about, but the bank is still unaware (such as a cheque that has been issued by the business, but not yet presented at the bank for payment).

The purpose of Bank Reconciliation The objective of Bank Reconciliation is to ensure that all entries in the Cash Receipts Journal and the Cash Payments Journal appear on the Bank Statement And to ensure that all entries of the Bank Statement appear in the business’s Cash journals. The Bank Reconciliation Statement shows the entries which the Bank still has to process, while we will add any missing entries from the Bank Statement in our CRJ and CPJ.

The steps of bank reconciliation 1.Compare the businesses records with the bank’s records (note all differences). 2.Complete the Cash Receipts Journal and Cash Payments Journal (add on the missing Bank statement information) 3.Post the updated CRJ and CPJ to the Bank account in the General Ledger. 4.Complete the Bank Reconciliation Statement (add on the missing CRJ/CPJ information)

1.Compare the businesses records with the bank’s records Each entry in the Bank column of the Cash Receipts Journal represents a deposit into the bank. Tick off each entry that appears in the Bank column and in the Bank Statement. Circle any entry that does not appear in both places. You may have circled items in the Cash Receipts Journal – these are the items the business knows about, but not the Bank; and you may have circled items in the Bank Statement – these are the items the Bank knows about before the business.

2.Complete the Cash Receipts Journal and Cash Payments Journal The business is now in a position to update its books (i.e. The Cash Journals), with all the entries which only the bank knows about. In other words all deposits which are circled in the Bank Statement must be inserted into the Cash Receipts Journal, and all cheques and payments which are circled in the Bank Statement must now be inserted into the Cash Payments Journal. The journals are then totalled

3.Post to the Bank account in the General Ledger The updated totals of the Bank columns from the CRJ and the CPJ in the journals are posted to the Bank account in the General Ledger and the account is balanced. The business can now compare the balance to that of the Bank Statement, but it is still unlikely to balance since you have not yet updated the banks information.

4.Complete and balance the Bank Reconciliation Statement The Reconciliation Statement is used to enter transactions which the bank still needs to process. Those items that are circled in the Cash Receipts Journal and Cash Payments Journal (i.e. the items which only the business has recorded so far) must be inserted into the Bank Reconciliation Statement First insert the balance as per the bank statement and the balance as per the bank account. The Bank Reconciliation Statement should balance if you have done everything correctly.

Note to remember In practice the Cash Journals are not totalled until the Bank Statement has been received and the information updated. However, for our purposes we total the Cash Journals before the comparison with the Bank Statement so that you begin your journals with the totals for the month so far, rather than having to rewrite all the entries for the month.

Worked example Check the circled amounts in CRJ/CPJ and Bank statement. General Rules Circled CRJ amounts go to Bank Recon Credit column Circled CPJ amounts go to Bank Recon Debit column Bank statement credits go to CRJ Bank statement debits go to CPJ NB – first check Additional information!!