Cambridge IGCSE Accounting · 0452
Chapter 3: Verification of Accounting Records — Part 3
Section 3.3 · Bank Reconciliation
A bank statement is a record of transactions for a bank account over a period, issued by the bank to the account holder. The key to this topic is understanding that the bank statement and the business’s Cash Book (bank column) should match, but rarely do due to timing differences and unrecorded items.
Why Balances Differ
The process of money moving between banks takes time (often at least five working days). This causes two main types of timing differences:
- Unpresented Cheques: Cheques written and sent by the business to a creditor that have not yet been processed by the creditor’s bank.
- Uncredited Deposits (Bank Lodgements): Cheques or cash received and recorded in the Cash Book that have been paid into the bank but do not yet appear on the bank statement.
- Dishonoured Cheques: A cheque received from a customer that the bank refuses to pay (e.g., due to insufficient funds). The business only finds out when the statement arrives.
The Bank’s Perspective (The “Reversal” Rule)
On a bank statement, the bank sees the business as a creditor because the bank owes the business the money in the account. Therefore:
- Credit Entry: Money entering the account (increases the balance).
- Debit Entry: Money leaving the account (decreases the balance).
- Bank Overdraft: When the business has withdrawn more money than is in the account (shown as a Debit balance on the statement).
Procedure for Reconciliation (Two Steps)
To verify that differences are due to timing and not errors, accountants follow a two-step process:
Step 1: Update the Cash Book
Check the bank statement for items the business was unaware of and record them in the Cash Book before preparing the reconciliation statement.
| Item (on bank statement, not in Cash Book) | Cash Book Entry |
|---|---|
| Credit transfer / dividend / bank interest received | Debit (receipt) |
| Bank charges / bank interest paid | Credit (payment) |
| Standing order (fixed regular payment) | Credit (payment) |
| Direct debit (variable regular payment) | Credit (payment) |
| Dishonoured cheque (customer’s cheque refused) | Credit (reverses earlier receipt) |
Worked Example 1: Updating the Cash Book
Cash Book bank column balance before update: $4,280. Bank statement shows items not yet recorded:
- Direct debit — electricity $165
- Standing order — rent $500
- Bank charges $25
- Credit transfer received $380
| Adjustment | $ |
|---|---|
| Balance before update | 4,280 |
| Add: Credit transfer (Dr Cash Book) | 380 |
| Less: Direct debit, standing order, bank charges (Cr Cash Book) | (690) |
| Updated Cash Book balance | 3,970 |
Step 2: Prepare the Bank Reconciliation Statement
This statement reconciles the updated Cash Book balance to the bank statement balance.
Worked Example 2: Full Bank Reconciliation Statement
Updated Cash Book balance: $3,970. Bank statement balance: $4,575.
- Unpresented cheques: $872
- Uncredited deposits (lodgements): $627
- Bank error — cheque $360 wrongly debited by bank (not a business error)
| Details | $ |
|---|---|
| Balance as per updated Cash Book | 3,970 |
| Add: Unpresented cheques | 872 |
| 4,842 | |
| Less: Uncredited deposits | (627) |
| 4,215 | |
| Add: Bank error (cheque wrongly debited) | 360 |
| Balance as per Bank Statement | 4,575 |
Memory aid: unpresented cheques are payments in the Cash Book not yet on the statement — add. Uncredited deposits are receipts in the Cash Book not yet on the statement — less.
Digital and Card Transactions
Modern businesses record receipts and payments by cash, cheque, debit/credit card, and online bank transfer. Card and transfer entries still appear in the bank column of the Cash Book once processed, but timing differences (e.g. card payments clearing overnight) create the same reconciliation issues as cheques. Digital bank feeds can auto-update the Cash Book, but accountants must still verify unpresented items and statement-only entries (direct debits, charges) at month-end.
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