topic 7 bank reconciliation

• Accuracy of the cash account can be checked physically:

  • count the cash in the till, this should agree with the amount of cash stated on the till roll
  • should also agree with the cash balance as shown in the cash account in the cash book
• Accuracy of the bank account can be checked by comparing the bank balance as shown in the bank account in the cash book with the balance shown on the latest bank statement. But the figures may differ slightly due to:

  • some items being processed automatically and not have been recorded in the cash book
  • errors may have been made when making cash book
  • bank might have made an error
  • timing differences
• Bank reconciliation - the process through which the business checks the accuracy of the business bank account by comparing it to the bank statement and reconciling any differences between the figures
• Bank reconciliation statement - Balance at bank as per the updated cash book + Unpresented cheques - Less lodgements outstanding = Balance at bank as per the bank statement
• The benefits of bank reconciliation:

  • it enables errors in the cash book to be identified and corrected
  • it enables missing items in the cash book to be identified, the cash book can then be updated to show the correct balance
  • it enables errors on the bank statement to be identified and notified to the bank for correction
  • it acts as a deterrent to fraud because the bank statement is an independent record
  • it enables out of date cheques to be identified and written back
  • it identifies dishonoured cheques so the business can seek repayment from customer
• Explain the reasons why the cash book and bank statement balances may not be the same - Some items are processed automatically by the bank and will not have been recorded in the cash book. Errors may have been made in completing the cash book for example if an incorrect figure is recorded on a cheque counterfoil. Occasionally the bank may have made an error but this is rare. Timing differences may mean a delay in bank processing cheques/deposits
• Explain the process of reconciling differences in the cash book and bank statement:

  • tick items common to both the bank column in the cash book and the bank statement
  • identify items in the bank statement which remain unticked
  • update the bank column in the cash book with those changes
  • identify items unticked in the cash book but not in the bank statement
  • complete a bank reconciliation statement by adding unpresented cheques and subtracting lodgements outstanding
• Assess the benefits of bank reconciliation:

  • it enables errors in the cash book to be identified and corrected
  • it enables missing items in the cash book to be identified, the cash book can then be updated to show the correct balance
  • it enables errors on the bank statement to be identified and notified to the bank for correction
  • it acts as a deterrent to fraud because the bank statement is an independent record
  • it enables out of date cheques to be identified and written back
  • it identifies dishonoured cheques so the business can seek repayment from customer