Bank Reconciliation Statements (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Purpose of a Bank Reconciliation Statement
What is the purpose of a bank reconciliation statement?
If the balance on the bank statement is different to the bank balance in the cash book, then the business produces a bank reconciliation statement
This is a statement which explains why the balances are different
The cash book can be updated with missing transactions that are on the bank statement
However, the business cannot update the bank statement with missing transactions that are in the cash book
A bank reconciliation statement is needed to show these
It contains details of any:
Unpresented cheques
Uncredited deposits
Errors
Preparing a Bank Reconciliation Statement
How do I prepare a bank reconciliation statement?
STEP 1
Update the cash book using the bank statementCalculate the updated balance
STEP 2
Start the bank reconciliation statement with the balance shown on the bank statementMake sure you check whether the balance represents money in the bank or the amount that the bank account is overdrawn
A debit balance on the bank statement represents an overdraft
STEP 3
Add any uncredited depositsThese are the debit entries in the cash book that are missing from the bank statement
If there is more than one, then
Add these amounts together in the left column of the bank reconciliation statement
Put the total in the right column
Add the total to the balance shown on the bank statement
STEP 4
Add any bank errors that have decreased the balance on the bank statementTotal these together with the previous entries
STEP 5
Subtract any unpresented chequesThese are the credit entries in the cash book that are missing from the bank statement
If there is more than one, then:
Add these amounts together in the left column of the bank reconciliation statement
Put the total in the right column
Subtract the total from the current amount in the right column in the statement
STEP 6
Subtract any bank errors that have increased the balance on the bank statementTotal these together with the previous entries
STEP 7
Check that this amount is equal to the bank balance shown in the cash bookIf the balance is negative, then the cash book should have a credit balance
Examiner Tips and Tricks
Compare the cash book and the bank statement. If a transaction appears on both of them, then put a tick next to the transaction in the cash book and on the bank statement. Then you just need to use the unticked entries in the cash book to complete a bank reconciliation statement.
Can I start the bank reconciliation statement with the balance shown in the cash book?
You can create the bank reconciliation statement using the reverse order:
Start with the balance shown in the cash book
Add the unpresented cheques
Subtract the uncredited deposits
Check that it is equal to the balance shown on the bank statement
Examiner Tips and Tricks
Always double-check whether the balance is positive or negative. This is the main reason why students lose marks in an exam!
Worked Example
Leo is a sole trader. On 31 March 2024, his bank statement showed that his business bank account was $345 overdrawn. On the same date, his cash book showed a credit balance of $395. Leo identified that some transactions were entered into his cash book but did not appear on his bank statement. These transactions are shown in the following extract of the cash book.
Extract of Cash Book (Bank columns)
Date | Details | $ | Date | Details | $ |
Mar 9 | Jacob | 500 | Mar 5 | Pru | 200 |
29 | Commission receivable | 300 | 23 | Wages | 750 |
Leo also noticed an error on his bank statement. A cheque paid for $100 for office expenses had been mistakenly processed twice by the bank.
Prepare the bank reconciliation statement for Leo at 31 March 2024.
Answer
Leo’s business bank account is overdrawn
So the bank reconciliation statement will start with a negative amount
The debit entries are the uncredited deposits
Their total will need to be added to the bank statement balance
The credit entries are the unpresented cheques
Their total will need to be subtracted from the bank statement balance
The error has caused his bank balance to be lower than it should be
Therefore, the amount of the bank error will need to be added to the bank statement balance
The cash book has a credit balance
Therefore this is a negative amount
Leo
Bank Reconciliation Statement at 31 March 2024
$ | $ | ||
Balance on bank statement | (345) | ||
Add: | Uncredited deposits | ||
Jacob | 500 | ||
Commission receivable | 300 | ||
Bank error | 100 | 900 | |
555 | |||
Less: | Unpresented cheques | ||
Pru | 200 | ||
Wages | 750 | (950) | |
Balance in cash book | (395) | ||
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