Bank reconciliations

The bank statement and the cash account record the same money from two points of view, and at month end they rarely agree. A bank reconciliation explains every difference and arrives at the true cash balance — the figure reported in the statement of financial position. It is also one of the most important internal controls a business has: it catches bank charges nobody recorded, customer cheques that bounced, payments keyed at the wrong amount and, occasionally, money leaving the account that nobody authorised.

Bank side — items the books already contain but the bank hasn't processed yet. They are timing differences: no journal entry is needed, because the bank will catch up within days. - Deposits in transit: takings recorded in the books, not yet credited by the bank. Add to the bank balance. - Outstanding (unpresented) cheques and payments: recorded in the books, not yet cleared. Subtract from the bank balance. - Bank errors — say, another customer's cheque charged to your account. Correct the bank balance and ask the bank to fix it; your books are right.

Book side — items on the statement the books don't have yet. These do need journal entries: - Bank charges, direct debits and returned (NSF) customer cheques: subtract. - Interest received and direct transfers from customers: add. - Errors in the books (a transposed figure, a payment recorded at the wrong amount): correct in whichever direction fixes them.

Both sides must reach the same adjusted balance. If they don't, something has been missed — don't force the figure with a "suspense" line.