Learning Outcomes
After reviewing this article, you will be able to prepare a bank reconciliation statement to compare the cash at bank general ledger balance with the bank statement. You will identify and explain reasons for discrepancies between these records, such as unpresented cheques and outstanding lodgements, and perform necessary corrections to ensure accuracy in the accounting system.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand the purpose of reconciling the bank ledger account to external bank statements and the process for preparing the reconciliation statement as part of regular financial control.
- Recognise why businesses must regularly reconcile bank records with bank statements
- Identify causes of discrepancies between the bank account in the general ledger and the bank statement
- Prepare a bank reconciliation statement that explains and reconciles differing balances
- Correct errors or omissions in the bank general ledger account
- Understand the role of timing differences (unpresented cheques and outstanding lodgements)
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following explains why a cheque payment recorded in the ledger does not appear on the bank statement?
- The cheque was stolen
- The cheque has not been presented
- The bank has made an error
- The supplier forgot to cash it
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You discover a bank charge on the bank statement that is not in your cash at bank account. What action should you take in the accounting records?
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True or false? Outstanding lodgements are receipts recorded in the general ledger but not yet shown on the bank statement.
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Outline the main purpose of preparing a bank reconciliation statement.
Introduction
A business records every bank transaction in its cash at bank ledger account. The bank, in turn, maintains its own record of the account through the bank statement. In practice, these two records rarely show the same balance at any given time. Preparing a bank reconciliation statement is necessary to explain and resolve any differences.
This article covers the preparation of the reconciliation statement, explains the main sources of timing and recording differences, and walks through a systematic approach to ensuring your cash records are both complete and accurate for financial control and reporting.
Key Term: bank reconciliation statement
A statement prepared to explain and reconcile the difference between the cash at bank balance in the general ledger and the balance on an external bank statement.
REASONS FOR DIFFERENCES BETWEEN BANK RECORDS AND BANK STATEMENTS
Discrepancies commonly arise from the timing of when transactions are recorded in the business's accounting system versus when they appear on the bank statement. Other causes include errors, omissions, or unauthorized transactions.
Timing Differences
Some transactions recorded in the general ledger have not yet been processed by the bank. These result in the two balances disagreeing temporarily.
Key Term: unpresented cheques
Cheques issued and recorded as payments in the cash at bank account, but not yet cleared or shown on the bank statement.Key Term: outstanding lodgements
Deposits or receipts recorded in the cash at bank general ledger but not yet processed and shown on the bank statement.
- Unpresented cheques: Payments are entered in the business's ledger when the cheque is written but only appear on the statement once the payee cashes the cheque and the bank clears it.
- Outstanding lodgements: Receipts are recorded in the ledger when cash or cheques are received, but may take several days to appear on the statement after being deposited.
Other Reasons for Discrepancies
- Direct debits, standing orders, or bank charges may appear on the bank statement before being recorded in the accounting system.
- Interest received or payments credited by the bank not yet recorded in the books.
- Errors or omissions made either by the business or, less commonly, by the bank.
STEPS IN PREPARING THE BANK RECONCILIATION STATEMENT
1. Check for and Record Any Missing Items
Compare the most recent bank statement to your updated cash at bank ledger account. Note any items on the bank statement not yet in the accounting records, such as bank charges, direct debits, interest, or returned/dishonoured cheques. Update your general ledger to include these items before starting the reconciliation.
2. Identify Timing Differences
Compare all payments and receipts in the ledger and bank statement. Tick off all matching items. The remaining unmatched entries are either:
- Unpresented cheques (issued but not yet cleared by the bank)
- Outstanding lodgements (deposited but not yet credited by the bank)
Make a list of the amounts and details of these differences for use in the reconciliation statement.
3. Prepare the Reconciliation Statement
Start with one balance—either the updated cash at bank ledger account or the bank statement balance. Adjust for timing differences:
- If starting with the bank statement balance:
- Add: Outstanding lodgements (deposits not yet appearing)
- Subtract: Unpresented cheques (cheques not yet cleared)
The final amount should equal the updated cash at bank general ledger account balance.
Worked Example 1.1
A business’s cash at bank general ledger shows a balance of $4,400 as at 31 March. The bank statement shows a balance of $5,500 on the same date. On review, you find:
- There are three cheques issued totaling $1,800 recorded in the ledger but not yet on the bank statement.
- A cash deposit of $700 appears in the ledger but is not yet credited on the bank statement.
Prepare the bank reconciliation statement as at 31 March.
Answer:
Bank statement balance: $5,500
Add: Outstanding lodgements: $700
$6,200
Less: Unpresented cheques: $1,800
Reconciled (ledger) balance: $4,400
4. Ensure All Errors or Omissions Are Corrected
If discrepancies remain after adjusting for timing differences, check for errors in amount, omission of entries, or duplicated transactions. Correct these in the general ledger as required.
Summary
Bank reconciliation ensures accuracy in your financial records and helps detect fraud or errors. Regularly reconciling your bank account to the external bank statement is essential for effective cash control.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the purpose of reconciling the bank ledger account to a bank statement
- Identify timing differences: unpresented cheques and outstanding lodgements
- Prepare a bank reconciliation statement step-by-step
- Correct errors and omissions in the cash at bank general ledger account
- Understand why regular reconciliation is key to accurate financial management
Key Terms and Concepts
- bank reconciliation statement
- unpresented cheques
- outstanding lodgements