Ask one question about each reconciling item: has the business already recorded it? If yes, it is a timing difference. If no, it is a cash book update.
This lesson belongs to finding the cause of a reconciliation difference. The layout itself is taught in reconciling the cash book and bank statement.
What is the test?
Look at the cash book. If the item is already there, nothing in the cash book is wrong, and the bank is simply behind. That is a timing difference, and it appears only in the reconciliation statement.
If the item is not in the cash book, the business has missed an entry. That is an update, and it must be recorded in the cash book first.
Worked example: May and June
At 31 May the statement shows these reconciling items against the cash book. The May statement is being compared with the cash book for the same month.
| Item | In cash book at 31 May? | Classification |
|---|---|---|
| Cheque 0588 to a supplier, RM275 | Yes | Timing difference |
| Deposit banked on 31 May, RM1 240 | Yes | Timing difference |
| Loan repayment by standing order, RM380 | No | Cash book update |
| RM28 for bank charges | No | Cash book update |
On the June statement, cheque 0588 shows as cleared on 3 June and the RM1 240 deposit shows as credited on 1 June. Neither item needed any entry in the cash book, because the business had recorded both in May.
The standing order and bank charges are on the May statement already. The cash book must be updated with RM380 and RM28 before the reconciliation statement is prepared, and they will not appear again in June.
Why the next statement helps
A timing difference is a prediction: the bank will catch up. The following statement proves it, because the item appears with a date in the new month.
An update is a correction: the business was incomplete. It does not clear by waiting, so if you leave it out of the cash book the difference will return every month.
The mistake that loses marks
The common slip is to treat a bank charge as a timing difference and list it under the reconciliation statement. The bank has charged it, so the statement is complete, and the cash book is the record that changes.
A reliable check is to imagine doing nothing. If the gap would close on its own, it is timing. If the gap would stay open, an entry is missing.
Check yourself
Classify each item as timing or update: (a) a cheque of RM90 written on 29 June, not on the statement; (b) interest of RM15 credited by the bank; (c) a customer’s cheque of RM400 returned unpaid by the bank; (d) a deposit of RM650 made after the bank’s cut-off time.
Answer
(a) Timing: already in the cash book, bank has not processed it.
(b) Update: the bank has recorded it, the cash book has not.
(c) Update: the bank has reversed the receipt, so the cash book must record the returned cheque.
(d) Timing: already in the cash book, credited by the bank on the next working day.
What to study next
Continue with handling an overdraft without changing the direction of every adjustment. Keep the entries straight with the debit-credit transaction trainer.
For a teacher to quiz you on item lists from your own papers, see online one-to-one Accounting tuition.