Bank and Creditor Reconciliations — Complete Notes

What you'll learn

• Why a business checks its own records against those kept by the bank and by its creditors.
• How to post items that appear on the bank statement or a creditor's statement but were never entered in your own books.
• How to prepare a Bank Reconciliation Statement and a Creditor's Reconciliation Statement.
• How timing differences such as outstanding deposits and outstanding cheques create short-term gaps between two sets of records.
• How to tell the difference between an item you must record and an item you must query.

The two sets of records

Every business keeps its own books. So does the bank, and so does every supplier (creditor). The two sets of records rarely agree on the very same day, because:

1. One party records a transaction before the other (a timing difference).
2. One party makes a mistake (an error).
3. One party forgets to record a transaction (an omission).

Reconciliation means comparing the two sets of records, correcting your own books, and explaining the differences that are simply timing. It is an internal control: it helps the business pick up fraud, errors and missing entries quickly.

Bank reconciliation

Key terms

• Bank statement — the document the bank sends showing every transaction on the business's account. It is the bank's record, written from the bank's point of view.
• Favourable balance (credit balance on the statement) — the bank owes the business money, in other words there is money in the bank. In the business's own books this is a debit balance in the Bank account (an asset).
• Unfavourable balance / overdraft (debit balance on the statement) — the business owes the bank money. In the business's own books this is a credit balance in the Bank account (a liability).
• Outstanding deposit — money received and recorded in the Cash Receipts Journal (CRJ), but not yet credited by the bank.
• Outstanding cheque or EFT — a payment recorded in the Cash Payments Journal (CPJ), but not yet presented to and paid by the bank.

Method

1. Update the cash journals. Work through the bank statement and post every item that appears there but not in your CRJ or CPJ.
2. Calculate the corrected Bank account balance — the earlier balance, plus the corrected CRJ total, minus the corrected CPJ total.
3. Prepare the Bank Reconciliation Statement to explain the remaining differences (outstanding deposits and outstanding cheques) until the statement balance agrees with your correct Bank account balance.

Where each item goes

Worked example 1 — Bank reconciliation

Lindiwe Traders, 31 March 2025.

• The bank statement shows a credit (favourable) balance of R18 450,00.
• The Bank account (General Ledger) shows a balance of R23 580,00.
• On comparing the two, you find the following items.

(a) On the bank statement only (not in the cash journals):

(b) In the cash journals only (not on the bank statement):

Step 1 — Post the statement items to the journals.

• CRJ: the direct deposit of R2 000,00 increases the bank balance by R2 000,00.
• CPJ: bank charges R210,00 + insurance R850,00 + rent R3 500,00 + cheque correction R270,00 = R4 830,00, which decreases the bank balance by R4 830,00.

Step 2 — Corrected Bank account balance.

Step 3 — Bank Reconciliation Statement.

The two figures now agree, so the records are reconciled.

Creditor reconciliation

Key terms

• Creditors Ledger — the business's own record of what it owes each supplier. A credit balance means money is owed to that supplier.
• Creditor's statement — the document a supplier sends showing what it believes the business owes.
• Recording items — items on the statement that belong in your books but were never entered (invoices, returns, discounts, interest).
• Query items — errors on the statement. You do not record these; you contact the supplier to have them corrected.

Where each item goes

Worked example 2 — Creditor reconciliation

Mzansi Hardware owes Tshwane Supplies. On 31 March 2025:

• The Creditors Ledger shows that Mzansi Hardware owes R12 600,00 to Tshwane Supplies. (This balance already includes an EFT payment of R3 000,00 made on 30 March.)
• The statement received from Tshwane Supplies shows a balance owing of R19 210,00.

Items on the statement that must be recorded in the Creditors Ledger:

Step 1 — Corrected Creditors Ledger balance.

Step 2 — Items that explain the remaining difference:

• The EFT payment of R3 000,00 is in our books but has not yet been recorded by Tshwane Supplies (a timing difference).
• Tshwane Supplies charged invoice INV-901 of R2 500,00 to our account in error — the goods were never received. This is an error to query.

Step 3 — Creditor's Reconciliation Statement.

The figures agree once the timing difference and the error are removed.

Common mistakes

• Adding an outstanding cheque when preparing the bank reconciliation instead of deducting it.
• Treating a bank error as something to record in the CPJ — a bank error is queried, not recorded.
• Forgetting to update the cash journals before preparing the reconciliation statement.
• Recording an item straight in the Bank account (General Ledger) instead of in the cash journals.
• In a creditor reconciliation, crediting the supplier's account for a payment already made, when a payment always reduces what we owe.
• Recording the creditor's error in our own Creditors Ledger instead of querying it.
• Confusing a favourable bank balance (a debit in our books) with an overdraft (a credit in our books).

Quick summary / cheat sheet

• Bank: update the journals, calculate the corrected Bank balance, then prepare the reconciliation statement for outstanding deposits and cheques.
• Bank charges, interest charged, debit and stop orders go to the CPJ. Direct deposits and interest received go to the CRJ.
• Favourable means money in the bank: a credit on the statement and a debit in our Bank account.
• Overdraft means a debit on the statement and a credit in our Bank account.
• In the reconciliation statement, add outstanding deposits and subtract outstanding cheques.
• Creditor ledger entries: an invoice or interest is credited; a return, discount or payment is debited.
• Errors on the statement are queried with the bank or supplier; they are never recorded.

Practice questions

1. A bank statement shows a favourable balance of R9 400,00. Outstanding deposits are R2 100,00 and outstanding cheques are R1 650,00. What is the correct debit balance of the Bank account?
2. Name two items that would appear on a bank statement and be entered in the Cash Payments Journal.
3. True or false: a bank error on the statement must be recorded in the business's CRJ.
4. The Creditors Ledger shows R7 500,00 owing to a supplier. An unrecorded invoice of R900,00 and an unrecorded discount received of R150,00 are then found. What is the corrected amount owing?
5. A supplier's statement shows R11 300,00 owing. Our ledger shows R9 800,00 after all corrections. A payment of R1 500,00 has not yet been recorded by the supplier. Do the records reconcile?
6. In a bank reconciliation, why is an outstanding deposit added rather than subtracted?

Answers

1. R9 400,00 + R2 100,00 − R1 650,00 = R9 850,00.
2. Any two of: bank charges, interest charged, debit orders, stop orders (all payments).
3. False. A bank error is queried with the bank and is not recorded in the business's journals.
4. R7 500,00 + R900,00 − R150,00 = R8 250,00.
5. Yes. R11 300,00 − R1 500,00 = R9 800,00, which agrees with the ledger.
6. An outstanding deposit is money already received and recorded by us, but not yet credited by the bank. The statement is therefore lower than our books, so we add it to the statement balance to bring it up to our correct balance.

Official EduRank Team notes. Always cross-check with your textbook and teacher.