Bank reconciliation

The process known as bank reconciliation involves aligning the data in your cashbook with that in your bank statement. You should do it when you get your bank statement, eg monthly, as it is an essential step to ensuring the accuracy of your books.
First you need to establish your cashbook balance which is simply:

balance = previous balance + money in – money out

If you use a spreadsheet, like my Cashbook.xls, you can set up a formula that automatically does this for you. Otherwise grab a calculator and tot up cashbook money in and money out since your last balance.
Your bank statement balance is unlikely to match that of your cashbook for the same period. This is usually due to timing differences between the two records but can also be the result of erroneous data entry or arithmetical error in the case of a cashbook in paper form. However spreadsheets massively reduce the scope for this sort of error.
If your cashbook balance exceeds that of your bank statement then a possible cause for this is uncleared deposits. These are cheques you’ve received, paid in and entered into your cashbook but that have not yet made it through the banks clearing process (of usually three or four working days.)
Another possibility is that direct debits, standing orders and bank charges, whilst in your bank statement, have yet to be written up in your cashbook. Whilst you’ve got this information in front of you, on the bank statement, enter it into your cashbook and re-total.
If your bank statement balance exceeds that of your cashbook then a possible cause for this is uncleared cheques that you have issued (eg to your suppliers.) As above you’ve entered them into your cashbook but they have not yet made it through the banks clearing process.
Another possibility is that bank interest has yet to be entered into your cashbook. Whilst you’ve got this information in front of you, on the bank statement, enter it into your cashbook and re-total.
You should now have all the information on the bank statement entered into the cashbook.
If there is still a discrepancy then tick off all the items in your cashbook that are also in the bank statement. The remaining entries should now be entered into a bank reconciliation statement as follows. These are the entries in your cashbook that are not yet in your bank statement.

BANK RECONCILIATION STATEMENT AS AT

DD/MM/CCYY

CASHBOOK

BANK ACCOUNT

DR
Money In

CR
Money Out

DR
Paid Out

CR
Paid In

BEGINNING BALANCE

X.XX
in credit

X.XX
overdrawn

X.XX
overdrawn

X.XX
in credit

TRANSACTS ON BANK STATEMENT ONLY

STANDING ORDERS

X.XX

DIRECT DEBITS

X.XX

BANK CHARGES

X.XX

BANK INTEREST

X.XX

OTHER

X.XX

X.XX

TRANSACTS IN CASHBOOK ONLY

UNCLEARED DEPOSITS

X.XX

UNCLEARED CHEQUES

X.XX

OTHER

X.XX

X.XX

ENDING BALANCE

X.XX
in credit

X.XX
overdrawn

X.XX
overdrawn

X.XX
in credit

NB The ENDING BALANCE’s should now be the same!
If there is still a discrepancy then this points to an error, either in data entry or arithmetic. Check all transactions in the bank statement against your version of those transactions in your cashbook until you find an error. Correct it, re-total and repeat the process until all errors have been corrected.
If the error is a really insignificant amount relative to the sort of transactions you have in your business then perhaps you can let it go and write up an adjustment for the error in your cashbook. It’s your call but strive for accuracy as it makes your books more credible and this is essential when dealing with HMRC and for business in general.
Download my bank reconciliation statement (Acrobat PDF) or worksheet (Excel).

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