AccountingRevision - Master A-Level Accounting with AI

Bank Reconciliation

A bank reconciliation is prepared to explain the difference between the cash book balance (the business's own record) and the bank statement balance (the bank's record). It is a key verification technique, prepared monthly.

Why the Two Balances Differ

Reason	In which document	Action
Uncleared lodgements (deposits recorded in cash book but not yet on bank statement)	Cash book only	Shown in reconciliation statement
Unpresented cheques (cheques written and recorded in cash book but not yet cleared at bank)	Cash book only	Shown in reconciliation statement
Direct debits / standing orders (bank debits business automatically)	Bank statement only	Update cash book (payments side)
Bank charges / interest	Bank statement only	Update cash book (payments side)
BACS / credit transfers received	Bank statement only	Update cash book (receipts side)
Dishonoured cheques (customer's cheque bounced — reversed by bank)	Bank statement only	Update cash book (payments side)
Errors by the business	Cash book only	Correct in updated cash book
Errors by the bank	Bank statement only	Shown in reconciliation statement

Three-Step Process

Step 1 — Compare and Tick

Place both documents side by side. Tick items that appear in both the cash book and the bank statement (they agree). Unticked items are differences.

Step 2 — Update the Cash Book

For unticked items on the bank statement only, update the cash book:

Add credits (BACS received, bank errors in business's favour) to the receipts side
Add debits (DD, SO, bank charges, dishonoured cheques, bank errors against business) to the payments side
Correct any cash book errors discovered

Calculate the updated cash book balance — this is the correct bank balance for the trial balance.

Step 3 — Prepare the Reconciliation Statement

Only unticked items in the cash book only (uncleared lodgements and unpresented cheques) remain to reconcile.

Reconciliation Statement Formats

Starting from the bank statement balance:

                                        £
Balance per bank statement            X,XXX
Add: uncleared lodgements               XXX
Less: unpresented cheques              (XXX)
                                      -----
Balance per updated cash book         X,XXX

Starting from the updated cash book balance:

                                        £
Balance per updated cash book         X,XXX
Less: uncleared lodgements             (XXX)
Add: unpresented cheques                XXX
                                      -----
Balance per bank statement            X,XXX

Overdraft alert: if either balance is a credit (overdraft), treat it as a negative figure and apply the same additions/deductions.

Cash Book Error Corrections

When a cash book error is found during reconciliation:

Error	Correction in updated cash book
Receipt recorded too high	Enter on payments side (reduces balance)
Receipt recorded too low	Enter on receipts side (increases balance)
Payment recorded too high	Enter on receipts side (increases balance)
Payment recorded too low	Enter on payments side (reduces balance)

Benefits of Bank Reconciliation

Confirms the correct bank balance to use in the trial balance and SFP
Identifies errors and omissions in the cash book
Tracks uncleared lodgements and unpresented cheques — improves cash flow planning
Identifies dishonoured cheques — prompts chasing the customer
Acts as a fraud deterrent — unauthorised payments would appear on the statement
Provides an independent check — the bank statement is produced externally

Verification of Records