Ten (10) causes of bank reconciliation

 

Earlier, we considered what a bank reconciliation statement means as well as its importance. Bank reconciliation statement was defined as the statement that is used to show the reasons for the discrepancies between the bank account of an entity’s ledger and bank statement. In this article, we look at ten causes of bank reconciliation. What are those items in the cash book (bank column) and bank statement that will result in their imbalance. 

1. Bank charges

In the bank statement, there are bank charges including VAT and account maintenance fees directly debited by the bank but are not reflected in the cash book (bank column). This is one of the primary causes of differences between the cash book and bank statement. 

2. Timing difference

Another cause of discrepancy is timing difference. This is common with online banking and the use of cheques. For online banking, delay caused by poor network connections may delay a transaction by at least a day. For cheques, it comes in the form of unpresented and uncredited cheques. 

Unpresented cheques arise when a business issued a cheque to a vendor but the vendor is yet to present the cheque for payment as at the time of reconciliation. On the other hand, uncredited cheques occur when the entity receives a cheque, sending it to the bank but the bank is yet to credit the entity. The difference in timing, that is, from when the cheque was issued or received and when the withdrawal or deposit entered the bank statement can result in differences leading to reconciliation.

3. Bank errors

The bank might make errors. And this will result in disagreements. Accounting errors can be done by the cashier of the bank. Such as debiting the wrong customer account or overstating the amount to debit or credit.

4. Reversals

A transaction done via internet banking may be reversed and the entity staff, customers or vendors may not realize it before the bank reconciliation is done.

5. Bank interests

These include savings deposits interest and loan interest. For keeping money in the bank, interest is credited to the bank customer at the end of the month. Also, the bank might charge the entity interest on loan as a result of a debt. These may not be posted in the cash book till reconciliation.

6. Dishonored cheques

Cheques issued or received by the entity may be dishonored by the bank for certain reasons. If this occurs and the correction is yet to be done on the cash book before reconciliation, it will cause differences in the accounts.

7. Standing order

The entity may authorize the bank to pay certain fees on their amount. For example, a company may authorize their banker to pay ICAN subscription fees of their staff at a particular date. The bank will not inform the company when they make the debit so the bank statement balance will be smaller than the cash book.

8. Errors in cash book

Also, the cashier of the entity may make errors similar to that of the bank such as overstating and understating figures. Accounting errors are discussed in the following article. 

9. Direct transfer/deposits

A customer or supplier can carry out a direct transfer from their mobile device and may not have informed the entity of it. Also, a customer might deposit money directly to the business bank without communicating the same. When this occurs, the value in the bank statement will be higher than that of the cash book.

10. Uncleared cheque

When cheques are presented to the bank it usually takes four days (as at the time of writing) for the bank to clear them for payment. This is because of the interbank settlement windows. If within these four days the bank reconciliation statement is done, then it will cause a difference in the cash book and bank statement.

Conclusion 

We discussed ten causes of differences between the cash book and bank statement. Among them bank charges are more common and are periodically reconciled in the cash book. Also, internet banking has changed the way businesses operate. Therefore, errors in the network connections may result in timing differences and reversals.