Bank reconciliation - Bank errors and timing differences

Learning Outcomes

After reading this article, you will be able to explain the purpose of a bank reconciliation, identify and categorise timing differences and bank errors, and prepare correct reconciliation statements. You will also be able to distinguish which differences require accounting entries and which do not, all in alignment with ACCA Maintaining Financial Records (FA2) exam requirements.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand both the reason for and techniques involved in reconciling bank records. You must also be able to identify errors and timing differences, make appropriate accounting adjustments, and determine the correct bank balance for financial statement purposes.

• Explain the purpose of reconciling the bank ledger account to the bank statement.
• Identify differences between accounting records and bank statements due to timing and errors.
• Prepare a bank reconciliation statement showing required reconciling items.
• Recognise which differences are timing-related and which result from errors needing adjustment.
• Make accounting entries where required in the general ledger to correct for identified errors.

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.

1. Which of the following is a timing difference rather than an error?
   1. Cheque paid to a supplier not yet cleared by the bank
   2. Bank charges not recorded in the accounting system
   3. Duplicate entry for a deposit in the cash ledger
   4. Misposted standing order amount in the bank books

2. True or false? All differences identified between the cash at bank account and the bank statement require entries in the accounting records.

3. Which items should be added to the bank statement balance to reconcile to the cash at bank ledger account?
   1. Unpresented cheques
   2. Outstanding deposits
   3. Bank charges not yet recorded
   4. Direct debits already in the ledger

4. What is the correct course of action regarding an error found on the bank statement?

Introduction

Bank reconciliation is a routine but essential task in financial record-keeping. Its purpose is to match the entity’s record of its bank account (as per the general ledger) with the balance reported by the bank. The reconciliation process identifies timing differences and genuine errors. Understanding how to distinguish between them and make the correct adjustments ensures the cash at bank balance in the financial statements is accurate—an area that is often assessed in ACCA examinations. This article will guide you through the practical steps, definitions, and calculations involved in bank reconciliations, with special emphasis on identifying and dealing with bank errors and timing differences.

Key Term: bank reconciliation
The process of comparing the entity’s cash at bank ledger account with the bank statement to identify and explain any differences between the two balances.

Timing Differences in Bank Reconciliation

Timing differences arise when transactions are recorded by the entity and the bank at different times. These are not errors and will resolve with time. Recognising these allows reconciliation without making unnecessary changes to the accounting records.

Common Timing Differences

• Unpresented Cheques
  These are cheques issued by the entity and recorded immediately in the cash at bank account, yet not cleared or shown as withdrawals on the bank statement by the reporting date.

Key Term: unpresented cheque
A cheque issued and recorded by the entity that has not yet been processed and deducted by the bank at the statement date.

Key Term: outstanding deposit
Funds received and recorded as banked by the entity but not yet credited by the bank by the statement date.

• Outstanding Deposits (Lodgements)
  Sums entered as receipts in the general ledger before the bank has processed them, causing the ledger to temporarily show a higher balance.

Worked Example 1.1

On 31 July, ABC Ltd's cash at bank ledger account shows a debit balance of $2,500. The bank statement shows a credit balance of $2,100. On review, you find a cheque of $800 sent to a supplier on 28 July is not yet shown on the bank statement, while a deposit of $400 made on 30 July appears in the ledger but not on the statement.

Question: Show the bank reconciliation statement as at 31 July using both timing differences.

Answer:
Start with the bank statement balance of $2,100.

• Add outstanding deposit (not on statement): $400
• Subtract unpresented cheque (not yet cleared): $800

$2,100 + $400 - $800 = $1,700

The adjusted bank statement balance ($1,700) now matches the cash at bank ledger account if all other items are fully reconciled.

Bank Errors

Errors affecting reconciliation may originate from the entity or the bank. When an error is identified, determine which party made it and correct it at the appropriate point.

Bank Errors

Bank errors are mistakes on the bank’s side, such as:

• Misposting amounts
• Debiting or crediting transactions belonging to another customer
• Incorrect transaction amounts

Key Term: bank error
An incorrect entry made by the bank on the bank statement, not reflecting the true transactions of the entity.

Correcting Bank Errors

If the bank statement is incorrect due to a bank error:

• Do not adjust the cash at bank ledger account (as it already reflects the correct transaction).
• Instead, notify the bank to correct its error.
• The reconciling item should be included on the bank reconciliation until the error is resolved by the bank.

Worked Example 1.2

A bank statement shows a deposit of $900 on 30 September, which does not belong to the entity. The correct cash at bank account (ledger) balance is $1,200, and the statement shows $2,100, with no other reconciling items.

Question: How should this error be presented in the reconciliation, and is an adjustment in the ledger required?

Answer:
The $900 is a bank error.
Bank statement balance: $2,100
Less: Bank error (incorrect deposit): $900
Adjusted balance: $1,200 (matches the ledger).
No adjustment is made in the entity’s accounts; the error is reported to the bank.

Exam Warning

Not every difference requires an accounting entry—timing differences do not; errors in the ledger or missing transactions do. Only adjust the general ledger for items not yet correctly recorded there (e.g., bank charges, direct debits you discover from the statement).

Preparing the Bank Reconciliation Statement

A systematic process should be followed for reconciliation:

1. Update the cash at bank ledger account for any transactions on the bank statement not yet in the ledger, such as bank fees or direct debits.
2. Tick off all items appearing in both records.
3. Identify unticked items:
   • Items in the cash book not on the bank statement are typically timing differences (unpresented cheques, outstanding deposits).
   • Items on the bank statement not in the ledger must be analysed—if valid, update the ledger.
   • Errors must be identified and resolved as required.
4. Prepare a bank reconciliation statement at the reporting date, listing all reconciliations clearly.

Worked Example 1.3

At 30 November, the ledger shows a debit balance of $3,400. The bank statement shows $2,950. The following items are identified:

• Cheque sent ($700) not yet shown on the statement
• Direct debit for utilities ($250) on the statement but not in the ledger
• Deposit of $1,000 in the ledger but not on the statement

Question: What steps should be taken, and what is the correct bank reconciliation statement?

Answer:

1. Record the direct debit in the cash at bank ledger (decrease by $250).

2. Adjusted ledger balance: $3,400 - $250 = $3,150.

3. Prepare the reconciliation:

• Start with bank statement: $2,950
• Add outstanding deposit: $1,000
• Subtract unpresented cheque: $700
• $2,950 + $1,000 - $700 = $3,250
• If there is still a $100 difference (because the $250 direct debit hasn't been recorded in the ledger, but $3,150 should become $3,250 if fixed), check calculations and correct the entries accordingly.

Identifying Which Items Require Ledger Adjustment

Only these require entries in the entity’s records:

• Items on the bank statement not yet recorded in the ledgers (e.g., direct debits, bank interest, bank charges)
• Errors made in the entity’s ledger

The following do not require entries in the ledgers:

• Bank errors (rectified by the bank)
• Timing differences (unpresented cheques, outstanding deposits)

Summary

Reconciling your bank ledger account with the bank statement ensures reported cash balances are accurate. Most differences arise from timing (unpresented cheques, outstanding deposits), which do not require adjustments in the accounting system. Only errors and omissions in the accounting records need correction by ledger entries. Bank errors are rare and must be rectified by the bank itself. Knowledge of these distinctions is essential for successful completion of ACCA FA2 exam questions on bank reconciliations.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the purpose and process of a bank reconciliation
• Identify unpresented cheques and outstanding deposits as timing differences
• Recognise bank errors and describe their correct treatment
• Distinguish timing differences from errors requiring entries in the accounting records
• Prepare and interpret a bank reconciliation statement

Key Terms and Concepts

• bank reconciliation
• unpresented cheque
• outstanding deposit
• bank error