Cash and Bank Reconciliation — full notes
Paper No. 1: Financial Accounting · Accounting for Assets and Liabilities - Cash/Bank Reconciliation
Cash and Bank Reconciliation
1. Why the two balances differ
A business keeps its own cash book; the bank keeps its own statement. Same underlying transactions, not always recorded at the same time - and sometimes the bank knows about something before the business does.
Timing differences (both records correct, not yet caught up):
- Unpresented cheques - written and recorded, not yet presented by the recipient
- Uncredited deposits (lodgements) - recorded and paid in, not yet processed by the bank
Items the bank already knows that the business does not (cash book needs correcting, not just reconciling):
- Bank charges and fees
- Standing orders or direct debits
- Direct credits - a customer paying straight into the account
- Dishonoured (bounced) cheques
- Interest earned
2. The two-step process
Step 1 - Adjust the cash book:
Balance per cash book (before adjustment)
Add: Direct credits, interest received
Less: Bank charges, standing orders, dishonoured cheques
= Adjusted cash book balance
Step 2 - Reconcile to the bank statement:
Balance per adjusted cash book
Add: Unpresented cheques
Less: Uncredited deposits
= Balance per bank statement
3. Worked example
Cash book balance (before adjustment): KES 85,000. Bank statement reveals a direct credit of KES 15,000, bank charges of KES 1,200, and a dishonoured cheque of KES 3,500 - none yet recorded. Separately, KES 22,000 of cheques written have not been presented, and KES 8,700 paid in has not yet been credited.
Step 1:
| KES | |
|---|---|
| Balance per cash book | 85,000 |
| Add direct credit | 15,000 |
| Less bank charges | (1,200) |
| Less dishonoured cheque | (3,500) |
| Adjusted cash book balance | 95,300 |
Step 2:
| KES | |
|---|---|
| Balance per adjusted cash book | 95,300 |
| Add unpresented cheques | 22,000 |
| Less uncredited deposits | (8,700) |
| Balance per bank statement | 108,600 |
The adjusted cash book figure (95,300) is what belongs on the Statement of Financial Position - the true cash position. The bank statement figure (108,600) still carries two timing differences that resolve themselves naturally.