Learn bank reconciliation by doing it

The cash book is the business's own record of its bank account. Receipts are on the debit side and payments are on the credit side. The bank statement is the bank's record of the same account.

The two are kept by different people and brought up to date at different times, so on any one day their balances differ. A bank reconciliation is the working that explains the gap.

The work has two halves. First the cash book is brought up to date with what the bank knew first. Then the items the bank has not seen yet are listed on a bank reconciliation statement.

Pebble Lane Florist has £2,417.00 in its cash book at the end of June. The bank statement for the same day shows £2,398.00.

Three items are on the statement and not in the cash book: bank charges of £23.00, a direct debit of £94.00 and £335.00 that a customer paid straight into the account. Entering them gives an updated cash book balance of £2,635.00.

Two items are in the cash book and not on the statement: takings of £465.00 paid in on the last day, and cheques of £228.00 that have not cleared.

The statement ends on £2,635.00, the updated cash book balance, so every pound of the gap is explained.

• Write up a cash book and balance it at the month end.
• Read a bank statement: paid out, paid in, the balance after each line and the code beside it.
• Tick every item that appears in both records, checking the amount each time.
• Enter in the cash book what the bank knew first.
• Tell a timing difference from an error, and say who corrects each kind of error.
• Lay out a bank reconciliation statement that starts with one balance and ends with the other.
• Do the same when the account is overdrawn.
• Say what an agreed reconciliation proves, and what it cannot.

The cash book comes first, because a reconciliation is a check on it. These are the modules to take, first to last.

1. Books of prime entry. Its room on the cash book shows that the cash book is the Bank account in the ledger: receipts on the debit side, payments on the credit side.
2. Bank reconciliation. Why the two balances differ, then a first reconciliation: tick what matches, list what does not, and prove that the balances agree.
3. The cash book. A cash book with analysis columns and VAT, how to balance it, and what a credit balance in the bank column means.
4. Bank statements. Reading a business statement, bank charges and interest, updating the cash book from the statement, then a reconciliation statement with more items, a gap to find and an overdrawn balance.
5. Month-end checks. Where the bank reconciliation sits among the month-end checks, what makes a reconciliation worth trusting, and what it cannot see.

Every difference between the cash book and the statement is one of three kinds, and each kind is dealt with in its own way.

Timing differences

in the cash book, but not on the statement yet. An unpresented cheque is a payment the bank has not paid out. An outstanding lodgement is money paid in that the bank has not shown. They go on the reconciliation statement and clear by themselves

Items the bank knows first

on the statement, but not in the cash book yet: bank charges, interest, direct debits, standing orders, a customer who pays straight in, and a customer's cheque that the bank refuses to pay. The cash book is brought up to date

Errors

a mistake in the cash book is corrected in the cash book. A mistake by the bank is reported to the bank, and the cash book is left alone

An unpresented cheque leaves the statement balance higher than the cash book. An outstanding lodgement leaves it lower.

The statement is written from the bank's side. Money in the account is money the bank owes the business, so the bank calls it a credit balance. In the business's own books the same money is a debit balance on Bank.

• Reconciling to the cash book before it has been updated. The reconciliation statement must end on the updated balance.
• Adding the cheques and taking off the lodgements. From the statement balance it is the other way round: the bank will add the lodgements and will take off the cheques.
• Listing bank charges or a direct debit on the reconciliation statement. They are not timing differences. They belong in the cash book.
• Dropping the minus sign when the account is overdrawn. An overdrawn balance is a minus figure. Adding a lodgement moves it up towards zero, and taking off a cheque moves it further down.
• Adding a line to force the two figures to agree. If the statement does not reach the cash book figure, something is still unexplained. A gap that divides exactly by 9 can mean two digits were swapped.
• Trusting an agreed reconciliation too far. It proves that the two records match. An item missing from both records will not show up.
• Leaving the reconciliation to the person who handles the money, with nobody to review it. It is a stronger check when someone else does it and a second person signs it.

Ledger Drill teaches bank reconciliation through questions, with no videos. A task shows a cash book and a statement for one invented business, then asks you to work on them.

• Sort a list of differences into timing differences and items the cash book is missing.
• Find the one line of a cash book or a statement that is wrong.
• Post bank charges, interest and a cheque returned unpaid.
• Type the updated cash book balance.
• Put the lines of a reconciliation statement in order, then type the figure it ends on.

Every answer is marked at once, with the working behind it.

The modules and rooms are listed below, in order. A room that costs nothing carries a Free tag.