What you'll learn
Bank reconciliation and control accounts are essential internal control mechanisms that businesses use to verify the accuracy of their accounting records. This revision guide covers the preparation of bank reconciliation statements and the operation of control accounts for trade receivables and trade payables. You'll learn how to identify and adjust for timing differences, errors, and omissions to ensure financial records are accurate and reliable.
Key terms and definitions
Bank reconciliation statement — A document prepared to explain the differences between the balance shown on the bank statement and the balance shown in the cash book at a particular date.
Unpresented cheques — Cheques that have been written and recorded in the cash book but have not yet been presented to the bank for payment, so do not appear on the bank statement.
Outstanding lodgements (or uncredited deposits) — Money paid into the bank account and recorded in the cash book but not yet credited by the bank, so not appearing on the bank statement.
Control account — A memorandum account maintained in the general ledger that records the total value of transactions with a particular category of accounts, used to check the accuracy of individual accounts in the subsidiary ledger.
Trade receivables control account (debtors control account) — A control account that shows the total amount owed to the business by all credit customers.
Trade payables control account (creditors control account) — A control account that shows the total amount owed by the business to all credit suppliers.
Contra entry — An entry that appears on both sides of the same control account or in both control accounts, representing a transaction between a customer and supplier who are the same entity.
Set-off — The process of offsetting a debt owed to a customer against a debt owed by that same customer to create a net balance.
Core concepts
The purpose of bank reconciliation
Bank reconciliation serves as an internal control mechanism to verify the accuracy of the cash book. Differences between the cash book balance and bank statement balance arise for two main reasons:
Timing differences:
- Items recorded in the cash book but not yet on the bank statement (unpresented cheques, outstanding lodgements)
- Items on the bank statement but not yet in the cash book (bank charges, interest received, direct debits, standing orders)
Errors:
- Mistakes in recording transactions in either the cash book or by the bank
- Dishonoured cheques not recorded in the cash book
- Incorrect amounts entered
Bank reconciliation helps businesses:
- Identify errors in the cash book
- Discover fraudulent transactions
- Ensure accurate cash balances for decision-making
- Maintain control over cash resources
Preparing a bank reconciliation statement
The standard approach starts with the bank statement balance and reconciles to the cash book balance (or vice versa). Follow this systematic process:
Step 1: Update the cash book Before preparing the reconciliation statement, the cash book must be updated for items appearing on the bank statement but not yet recorded:
- Bank charges (debit side of cash book)
- Bank interest received (credit side of cash book)
- Direct debits and standing orders (debit side of cash book)
- Direct credits (credit side of cash book)
- Dishonoured cheques (debit side of cash book, reversing the original receipt)
Step 2: Identify timing differences Compare the updated cash book with the bank statement to identify:
- Unpresented cheques (in cash book but not on bank statement)
- Outstanding lodgements (in cash book but not on bank statement)
Step 3: Prepare the reconciliation statement Starting with the bank statement balance:
Balance per bank statement £X,XXX (DR or CR)
Add: Outstanding lodgements £X,XXX
______
£X,XXX
Less: Unpresented cheques (£X,XXX)
______
Balance as per cash book £X,XXX
======
Important: If the bank statement shows a credit balance, the business has money in the bank. If it shows a debit balance, the business is overdrawn (the bank is a debtor to the account holder from the bank's perspective).
Understanding control accounts
Control accounts provide a check on the accuracy of individual accounts maintained in the subsidiary ledgers. They record total transactions without individual customer or supplier details.
The subsidiary ledger system:
- Sales ledger contains individual trade receivables accounts
- Purchases ledger contains individual trade payables accounts
- General ledger contains control accounts and other accounts
Control accounts summarize all transactions affecting trade receivables or trade payables. The total of individual accounts in the subsidiary ledger should equal the control account balance.
Trade receivables control account
This account records all transactions with credit customers in total. The standard format is:
Trade Receivables Control Account
£ £
Balance b/d X,XXX Bank/Cash received X,XXX
Credit sales X,XXX Sales returns XXX
Dishonoured cheques XXX Discounts allowed XXX
Interest charged on XXX Bad debts written off XXX
overdue accounts Contra entries XXX
Balance c/d X,XXX
_______ _______
XX,XXX XX,XXX
======= =======
Balance b/d X,XXX
Debit side entries (increasing amounts owed):
- Opening balance of receivables
- Credit sales for the period
- Dishonoured cheques (cheques from customers that bounce)
- Interest charged on overdue accounts
Credit side entries (decreasing amounts owed):
- Cash and cheques received from credit customers
- Sales returns (returns inwards)
- Discounts allowed to customers
- Bad debts written off
- Contra entries with trade payables
Trade payables control account
This account records all transactions with credit suppliers in total:
Trade Payables Control Account
£ £
Bank/Cash paid X,XXX Balance b/d X,XXX
Purchases returns XXX Credit purchases X,XXX
Discounts received XXX Interest charged by XXX
Contra entries XXX suppliers
Balance c/d X,XXX
_______ _______
XX,XXX XX,XXX
======= =======
Balance b/d X,XXX
Debit side entries (decreasing amounts owed):
- Cash and cheques paid to credit suppliers
- Purchases returns (returns outwards)
- Discounts received from suppliers
- Contra entries with trade receivables
Credit side entries (increasing amounts owed):
- Opening balance of payables
- Credit purchases for the period
- Interest charged by suppliers on overdue accounts
Contra entries in control accounts
A contra entry occurs when the same entity is both a customer and a supplier. Rather than making two separate payments, the business sets off the smaller amount against the larger.
For example, if Customer A owes £500 and the business owes Customer A (as a supplier) £300, a contra entry of £300 is recorded:
- Debit trade payables control account (reducing liability)
- Credit trade receivables control account (reducing asset)
Only the net amount (£200) is collected from the customer.
Reconciling control accounts with subsidiary ledgers
Control accounts should be reconciled regularly with subsidiary ledgers:
- Total the individual balances in the subsidiary ledger
- Compare with the control account balance
- Investigate and correct any differences
Common causes of differences:
- Errors in posting to individual accounts
- Omissions from the subsidiary ledger
- Errors in calculating the control account balance
- Transactions recorded in one place but not the other
Worked examples
Example 1: Bank reconciliation statement (8 marks)
On 31 March 2024, J. Williams' cash book showed a debit balance of £4,870. The bank statement on the same date showed a credit balance of £5,940.
On investigation, the following were discovered:
- Unpresented cheques totalled £1,320
- A lodgement of £650 paid in on 31 March had not been credited by the bank
- Bank charges of £120 had not been entered in the cash book
- A customer's cheque for £280 had been dishonoured but not recorded in the cash book
- A standing order payment of £200 to a supplier had not been recorded in the cash book
Required: (a) Prepare the updated cash book. (4 marks) (b) Prepare a bank reconciliation statement at 31 March 2024. (4 marks)
Solution:
(a) Updated Cash Book (Bank columns only)
Debit side £ Credit side £
Balance b/d 4,870 Bank charges 120
Dishonoured cheque 280
Standing order 200
Balance c/d 4,270
______ _____
4,870 4,870
====== =====
Balance b/d 4,270
(b) Bank Reconciliation Statement as at 31 March 2024
£
Balance as per bank statement (credit) 5,940
Add: Outstanding lodgement 650
______
6,590
Less: Unpresented cheques (1,320)
______
Balance as per updated cash book 4,270
======
Mark scheme guidance: Award 1 mark per correct cash book entry. Award 1 mark for correct bank statement balance, 1 mark for outstanding lodgement, 1 mark for unpresented cheques, 1 mark for correct final balance.
Example 2: Trade receivables control account (10 marks)
The following information relates to K. Ahmed's business for the month of April 2024:
- Balance of trade receivables at 1 April: £18,650
- Credit sales during April: £42,300
- Returns inwards: £1,850
- Cash received from credit customers: £38,700
- Discounts allowed: £1,420
- Bad debts written off: £680
- A dishonoured cheque: £540
- Contra entry with trade payables: £450
Required: Prepare the trade receivables control account for April 2024. (10 marks)
Solution:
Trade Receivables Control Account
£ £
Balance b/d 18,650 Bank 38,700
Credit sales 42,300 Returns inwards 1,850
Dishonoured cheque 540 Discounts allowed 1,420
Bad debts 680
Contra 450
Balance c/d 18,390
_______ _______
61,490 61,490
======= =======
Balance b/d 18,390
Mark scheme guidance: Award 1 mark for each correct entry (8 marks), 1 mark for correct balancing figure, 1 mark for balance brought down on correct side.
Example 3: Identifying errors using control accounts (6 marks)
The trade payables control account shows a balance of £15,840, but the total of individual supplier accounts in the purchases ledger is £16,190.
Investigation revealed:
- Purchases returns of £280 were entered twice in the control account
- A payment to a supplier of £550 was correctly recorded in the control account but entered in the purchases ledger as £505
- Discounts received totalling £325 were not recorded in the control account
Required: Calculate the corrected balance for the trade payables control account. (6 marks)
Solution:
£
Original control account balance 15,840
Add: Purchases returns entered twice (add back one entry) 280
Add: Discounts received not recorded 325
______
Corrected control account balance 16,445
======
Note: The purchases ledger error (£550 vs £505) affects only the subsidiary ledger, not the control account, as the control account had the correct figure.
The difference of £255 (£16,445 - £16,190) represents the purchases ledger error.
Mark scheme guidance: Award 2 marks for each correct adjustment identified and applied correctly to the control account balance.
Common mistakes and how to avoid them
Confusing bank perspective with business perspective: Remember that a credit balance on a bank statement means the business has money in the bank (the bank owes the business). A debit balance means an overdraft. Don't reverse these in your reconciliation.
Failing to update the cash book first: Items appearing on the bank statement but not in the cash book (bank charges, interest, direct debits, standing orders) must be entered in the cash book before preparing the reconciliation statement. The reconciliation statement only deals with timing differences.
Recording contra entries incorrectly: A contra entry always appears as a debit in one control account and a credit in the other. It reduces both trade receivables and trade payables by the same amount.
Adding when you should subtract (and vice versa): When reconciling from bank statement to cash book: add outstanding lodgements (money not yet credited by bank) and deduct unpresented cheques (payments not yet cleared). Check the logic: if you've written cheques the bank hasn't paid yet, you have less money than the bank statement shows.
Mixing up returns inwards and returns outwards: Returns inwards (sales returns) reduce trade receivables; returns outwards (purchases returns) reduce trade payables. Use the alternative names to avoid confusion.
Incorrect positioning of dishonoured cheques: A dishonoured cheque increases trade receivables (debit side) because the customer still owes the money. It also appears in the cash book update as a credit (reducing the bank balance).
Exam technique for "Bank Reconciliation and Control Accounts"
Command word recognition: "Prepare" requires you to construct a complete statement or account with correct format and labels. "Calculate" needs workings shown. "Identify" requires listing specific items. "Explain" demands reasons, not just descriptions.
Format matters for control accounts: Always use T-account format unless specifically told otherwise. Label debit and credit sides. Show both the closing balance carried down and brought down. Include proper headings. Examiners deduct marks for poor presentation.
Work systematically through bank reconciliations: (1) Update the cash book for all bank statement items not yet recorded. (2) Calculate the new cash book balance. (3) Start with the bank statement balance in your reconciliation. (4) Adjust for timing differences only. Show all workings—part marks are available even if your final answer is incorrect.
Check your arithmetic: Control account questions often award marks for correct balancing. Add both sides of the T-account to verify they equal. If they don't match, check each entry before submitting. Allow 2-3 minutes at the end of control account questions to verify your calculations.
Quick revision summary
Bank reconciliation statements explain differences between cash book and bank statement balances by adjusting for timing differences (unpresented cheques, outstanding lodgements) and updating the cash book for items not yet recorded. Control accounts summarize all transactions with trade receivables or trade payables, providing a check against subsidiary ledgers. Trade receivables control accounts show total customer balances; trade payables control accounts show total supplier balances. Contra entries reduce both control accounts when the same entity is both customer and supplier. Regular reconciliation between control accounts and subsidiary ledgers ensures accuracy and identifies errors.