Bank Reconciliation


This is the process where we check that our bank balance as
per our accounts matches our clients bank statement.

Quite often the bank balance on the accounts can be
different to the bank statement this is due to two different reasons:

      We have made a mistake with our bookkeeping (or
the bank has made an error)

       The entries are correct, but some of the
transactions on our bookkeeping have not shown on the Bank Statement yet

 

Let’s look at these in more detail then we will do a basic
bank reconciliation together.

We have made a
mistake with our bookkeeping (or the bank has made an error)

I have known on a few occasions that the bank made an error
the usual time this happens is if a client’s writing on a cheque is written in
such a way that it can easily be misread. I must admit in all my years in
accountancy I have only seen this on 3-4 occasions.

The more likely scenario is we have made a mistake in our
bookkeeping and bank reconciliations are a good time for us to check the
transactions that we have entered to ensure we have them correct. The best
place to find your errors is in your office, NOT in a client meeting. We are
all human and prone to human error so errors will happen. I always believe
making an error is not the problem, failing to spot an error is the problem.
The BANK Reconciliation should help

 

The entries are
correct, but some of the transactions on our bookkeeping have not shown on the
Bank Statement yet

Let’s say as an example our client on 31st March
writes a cheque for £95 for his bookkeeping, you haven’t banked his cheque yet
so it quite obviously won’t have come out of his bank account. However, you are
preparing his bookkeeping to 31st March and the cheque book stub is
completed so you enter it in your books.

You then see the bank statement balance is £95 higher than
the balance on your accounts.

You were quite right to enter the transaction and your
balance is the correct one you just need to know not to enter in April when
it comes out of his bank.

This is where your bank reconciliation comes into effect.
Also if you’re not doing the clients year end accounts (if he has an
accountant) you need to show this reconciliation.

So let’s look at both options (example 1 is an error) and
example 2 will show a bank timing difference and do the two bank
reconciliations.

 

 

 

 

 

 

 

Example 1

Statement for Mr Market
Trader

Account Number 123456

Sort Code 01-02-03

Statement Number 1

Statement Date 31/03/2013

DATE

Description

Money In

Money Out

Balance

1/3/13

Opening balance

 

 

0

2/3/12

Cash banked

1000

 

1000

3/3/12

Cheque 1

 

200

800

4/3/12

Direct debit : SUPPLIER ANYONE LTD

 

500

300

5/3/12

Cash banked

1000

 

1300

6/3/12

CHEQUE 2

 

500

800

7/3/12

CHEQUE 3

 

200

600

8/3/12

Cash banked

1000

 

1600

31/3/12

CHEQUE 4

 

500

1100

 

And our bank account transactions look like this

We have £3000 debits and £1700 credits which gives us a bank
balance of £1300 whereas the bank statement shows a balance of £1100 it’s
simply a case of going down the statement and checking our entries

 

 

 

As you can see I’ve highlighted our error all we need to do
now is correct our mistake (we have looked at the invoice and it was £500 so we
know the bank is correct and we have made the error) also look at the supplier
account to make sure we have put the correct figure in there.

Example 2

Statement for Mr Market
Trader

Account Number 123456

Sort Code 01-02-03

Statement Number 1

Statement Date
31/03/2013

DATE

Description

Money In

Money Out

Balance

1/3/13

Opening balance

 

 

0

2/3/12

Cash banked

1000

 

1000

3/3/12

Cheque 1

 

200

800

4/3/12

Direct debit : SUPPLIER ANYONE LTD

 

500

300

5/3/12

Cash banked

1000

 

1300

6/3/12

CHEQUE 2

 

500

800

7/3/12

CHEQUE 3

 

200

600

8/3/12

Cash banked

1000

 

1600

 

And our bank account transactions look like this

So now we have a bank balance on our accounts of £3000-£1900
= £1100 but the bank statement shows £1600 we check the entries are correct and
find they are but notice Cheque 4 on our accounts for £500 isn’t on the bank
statement.

I use a form for this that I keep in the client file so I
have it to hand next time I do the clients work.

So I show my bank balance add to it the un-presented cheque
and that should match the bank statement if it does our entries are correct.

If this was the client’s year end and you were passing the
work to an accountant I would suggest you pass the bank reconciliation sheet to
them.

Doing bank reconciliations is the only way you can ensure
you’re entering your bank transactions correctly.

 

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