What Is Bank Reconciliation? (Grade 11 NSC Matric Accounting): Revision Notes

What Is Bank Reconciliation?

Introduction to bank reconciliation

Bank reconciliation is an essential component of a business's internal control system. It involves comparing the cash records maintained by the business with the information provided by the bank to ensure accuracy and identify any discrepancies.

When a business performs a bank reconciliation, it checks two sets of records against each other:

Records kept by the business:

• Cash Receipts Journal (CRJ) - records all money received
• Cash Payments Journal (CPJ) - records all money paid out
• Bank account in the General Ledger - the business's record of their bank balance

Records kept by the bank:

• Bank statement - the bank's record of the business's account activity

The business carefully examines any differences between these records and makes necessary corrections. This process is called reconciling the records of the business with the records of the bank.

Why do differences occur?

Differences between the business's records and the bank statement can arise for two main reasons:

• Different timing in recording information - For example, when you write a cheque to pay a supplier, you record it immediately in your Cash Payments Journal. However, the bank only records it when the supplier presents the cheque for payment, which might be days or weeks later.

• Errors in recording information - Mistakes can happen on either side. The business might record an incorrect amount, or the bank might process a transaction incorrectly.

Reasons for bank reconciliation

Performing regular bank reconciliation serves several important purposes for a business:

• Verifies the actual cash balance - It confirms exactly how much money the business has in its bank account. This is crucial for financial planning and decision-making.

• Helps manage cash flow effectively - By knowing the true bank balance, the business can better control when and how much money comes in and goes out.

• Provides an opportunity to correct errors - The reconciliation process helps identify and fix mistakes made by either the business or the bank. For example, if the bank processed a cheque for the wrong amount, the reconciliation will highlight this discrepancy.

• Helps detect unusual or incorrect transactions - Regular reconciliation can uncover irregularities such as unauthorised transactions, fraud, or duplicated payments. This protects the business's assets and ensures financial integrity.

Procedure for bank reconciliation

Follow these steps to complete a bank reconciliation systematically:

Step 1: Compare with the previous month

Start by comparing the bank reconciliation statement from the previous month with the current bank statement. Look for any differences that appeared in last month's reconciliation. Mark these differences if they still don't appear in both sets of records. Some items from last month should now have been processed by the bank.

Step 2: Check Cash Receipts Journal entries

Compare all amounts recorded in the bank column of the Cash Receipts Journal with the deposits (credits) shown on the bank statement. Mark any differences where a deposit appears in one record but not the other.

Step 3: Check Cash Payments Journal entries

Compare all amounts recorded in the bank column of the Cash Payments Journal with the payments (debits) shown on the bank statement. Mark any differences where a payment appears in one record but not the other.

Step 4: Investigate previous items

Look at items that were marked on the previous month's bank reconciliation statement. Check if they have now been processed. If they have been processed, no further action is needed. If they haven't, they may need corrections or should be recorded again in the current bank reconciliation statement.

Step 5: Record differences in appropriate places

For each difference you've identified, decide where to record it:

• If the bank statement shows something that the business hasn't recorded, update the cash journals (CRJ or CPJ) of the business.
• If the bank needs to make a correction, record this item on the bank reconciliation statement.

Step 6: Correct the cash journals

For all differences that were marked on the cash journals, either record them in the bank reconciliation statement or make corrections directly in the cash journals themselves.

Step 7: Update the Bank account

Post the corrected totals from the cash journals to the Bank account in the General Ledger of the business. This updates the business's record of the bank balance.

Step 8: Final check

The new balance shown in the Bank account in the General Ledger should now match the balance according to the bank reconciliation statement. If they don't match, review your work to find any errors.

Possible entries in the Cash Receipts Journal

When reconciling, you may discover receipts that need to be recorded in the Cash Receipts Journal. These are items where money has been added to the bank account, but the business hasn't recorded them yet. Common examples include:

• Direct deposits on the current bank account - When customers or tenants pay money directly into the business's bank account without going through the business's cash system first. For example, a tenant might do an electronic transfer for rent payment.

• Receipts not recorded or entries omitted - Sometimes the business forgets to record a receipt in their books. The bank reconciliation helps identify these omissions.

• Cancellation of cheques - When a cheque that was previously issued is cancelled, the money becomes available again. This needs to be recorded as a receipt.

• Correction of payments - If the business recorded a payment in the Cash Payments Journal for an amount that was too high, the difference must be corrected by recording a receipt for the excess amount.

• Interest received from the bank - Banks sometimes pay interest on positive account balances. This interest appears on the bank statement but the business won't know about it until they receive the statement.

Possible entries in the Cash Payments Journal

Similarly, you may find payments that need to be recorded in the Cash Payments Journal. These are items where money has been taken from the bank account, but the business hasn't recorded them yet. Common examples include:

• Stop orders or debit orders - These are automatic payments that the bank processes on behalf of the business. The bank has already paid them, but the business may not have recorded them yet. Examples include monthly insurance premiums or loan repayments.

• Bank charges not yet recorded - Banks charge fees for various services such as account maintenance, transaction fees, or cash deposit fees. These charges appear on the bank statement but need to be recorded in the business's books.

• Interest on overdraft - If the business has an overdraft (negative balance), the bank charges interest on this. This expense needs to be recorded.

• Dishonoured cheques (RD) - When a customer's cheque bounces due to insufficient funds, the bank returns it and reverses the deposit. The business must record this as a payment since the money is no longer in their account. These are marked as "RD" (returned dishonoured).

• Correction of payments - If the business recorded a payment in the Cash Payments Journal for an amount that was too little, the difference must be corrected by recording an additional payment.

• Electronic fund transfers not yet recorded - Electronic payments made from the bank account that the business hasn't yet recorded in their books.

• Payments not recorded or entries omitted - Sometimes payments are made but not recorded. The reconciliation process identifies these missing entries.

Possible entries on the bank reconciliation statement

Some items are recorded on the bank reconciliation statement itself rather than in the cash journals. These are items that the business has already recorded but the bank has not yet processed:

• Outstanding deposits - Deposits that the business has recorded in their Cash Receipts Journal and taken to the bank, but which haven't yet appeared on the bank statement. This often happens with deposits made near month-end. The bank statement is also called "deposits not yet recorded by the bank."

• Outstanding cheques - Cheques that the business has written and recorded in their Cash Payments Journal, but which haven't yet been presented to the bank for payment. Also called "cheques not yet presented for payment.". For example, if you write a cheque to a supplier on 28 June, but they only deposit it on 3 July, it will be outstanding at 30 June.

• Correction of errors made by the bank - Sometimes the bank makes mistakes, such as processing a transaction for the wrong amount or debiting the wrong account. These errors must be noted on the bank reconciliation statement so the bank can correct them.

Special cases requiring no entry

There are certain situations where transactions occur, but no immediate journal entry is required at that moment:

Post-dated cheques received

When a business receives a post-dated cheque from a debtor (a cheque dated for a future date), follow this specific procedure:

1. Record the cheque in the post-dated cheque register (a special record book for future-dated cheques)
2. Keep the cheque in a safe place until the date written on the cheque arrives
3. On the date shown on the cheque, issue a receipt to the debtor
4. Record the transaction in the Cash Receipts Journal on that date
5. Deposit the cheque into the bank

Outstanding items from the previous month

Sometimes items that were outstanding on the previous month's bank reconciliation statement will appear on the current month's bank statement. When this happens:

• Outstanding deposits from last month - If these appear on the current bank statement, no new entry is needed because they were already recorded in the business's books last month.

• Outstanding cheques from last month - If these appear on the current bank statement, no new entry is needed because they were already recorded in the business's books last month.

These items were reconciling items last month but have now been processed by the bank, so the timing difference has resolved itself naturally.

Worked example: Mass Traders

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