There are two primary reasons for reconciling a cashbook.
Primarily it demonstrates that every entry on the corresponding bank statements is recorded accurately in the cashbook.
Secondarily it provides a basis to prove that the calculated cashbook balance is correct, even though it may differ from the balance shown on the bank statement for the same date.
When to Perform the Reconciliation
Often businesses have externally imposed accounting dates. For instance in the UK VAT registered businesses have to submit a tax return typically on a quarterly basis. Furthermore income tax in the UK is calculated on an annual basis. Accounting at such dates require cashbooks to be reconciled. However many businesses reconcile their cashbooks at each month end after receiving their bank statements.
How to Begin
It is necessary to be meticulous and methodical in the reconciling process from the outset in order to succeed. Choose a pen of a different colour to the one in which the entries are written (red ink usually stands out well). Make tick marks small but legible.
Follow these steps carefully:
Rule a line across the bank statement at the date at which you wish to reconcile the balances. (see When to Perform the Reconciliation).
Move sequentially through the entries of the cashbook and find each corresponding entry on the bank statement. If it occurs before the reconciling date line tick both the entry in the cashbook and that on the statement. If it cannot be found or if it occurs after the date line do not tick either of the entries.
Continue this procedure until reaching the final entry in the cashbook at the accounting date.
Write a list of any entries which occur in the cashbook but have not appeared before the date line on the bank statements. These are known as “Unpresented Items” on the basis that they will appear on the statements at a later date. If they fail to do so after say six months they should be written back into the cashbook as an opposite entry to its original.
Write a list of entries which occur on the statements but do not appear in the cashbook. These are omissions and will at the end of the procedure be entered in the cashbook.
Write a list of the differences (errors) between entries in the cashbook and their corresponding entry on the bank statement.
Prepare the reconciliation
To effect the reconciliation of the cashbook:
Write on a clean sheet, which in practice is often a new page within the actual cashbook, the closing cashbook balance (see the article How to Prepare a Cashbook). Adjust the figure for entries which appear on the bank statements but are not entered in the cashbook and for the errors discovered (see figure 1).
In a column alongside the cashbook balance write the closing balance at the accounting date found on the bank statement. Adjust that figure by the list of unpresented items. The adjusted cashbook balance should now equal the adjusted bank balance. If it does not do so then check your workings and correct them.
Finally correct the cashbook in respect of the missing or mistaken entries and use the corrected balance as the correct cashbook balance for the next accounting period.