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CHAPTER 8: BANK RECONCILIATION

Every business set up in Singapore will have at least a bank account (known as current or chequing account) so that it can deposit cheques or cash received from their customers or to issue cheques to its suppliers.

From the business's point of view, the accountant working for a business will draw up a Cash Book to record all transactions (cash or cheques) involving the business bank account.

On the other hand, the bank will also keep a record depicting all transactions involving its customer's bank account. At the end of every month, the bank will send a Month-end Bank Statement to its customer. This Statement will allow its customer to counter-check their own records (kept in a Cash Book).

Which is more accurate - Cash Book or Bank Statement?

A Cash Book updates all transactions involving the business bank account. Hence, if Peter Trading Company issues a cheque of S$500 on March 31 (the last day of March), this transaction will be captured in the Company's Cash Book. However, Peter Trading's supplier may present the cheque on Apr 02. Hence, the Bank Statement as of 31 March will exclude the above transaction.

On the other hand, the Bank will possess the first-hand information on whether a cheque presented is dishonoured or not. Hence, if Peter Trading Company deposits a cheque on March 30, the accountant will know if the cheque is dishonoured or not probably in the first week of April when he receives the Bank Statement.(Some banks will notify their customers of dishonoured cheques based on good banking relationship)

In summary:

There are some transactions (e.g. cheques issued but yet to be presented to the bank, deposits made by the business after the bank had finalised its statement to the business) that only the business knows about but not the bank as these transactions occurred after the Bank Statement was issued;

There are also some transactions (e.g. bank charges/fees, interest charges, automatic withdrawals (e.g. GIRO) or standing orders, automatic deposits (e.g. income from investments, interest, dividends) and dishonoured cheque) that only the bank knows about but which the business is unaware of until it receives the Bank Statement.

The fact that both the Cash Book and Bank Statement are produced from two different parties (namely the Business and the Bank), and the first-hand knowledge each party possesses, there exists a need to reconcile both balances. Businesses will usually highlight the discrepancies in a Bank Reconciliation Statement.