Chapter 4
Bank Reconciliation Statements
Notes to teachers
1
Start with Chapter 4 of Frank Wood’s Introduction to Accounting and briefly explain to students the
basic principles of recording in the cash book.
2
It is necessary to show a (real or simulated) bank statement to students as most of them would probably
have no idea of what one looks like.
3
Most students have difficulty understanding why a debit bank balance appearing in the cash book
represents a positive balance while a debit bank balance appearing in the bank statement represents a
negative (overdraft) balance. Teachers must clarify a bank deposit from the perspectives of the business
and the bank (whether it is treated as an asset or a liability).
4
Most students have the misconception that a bank reconciliation statement is used to make corrections in
the cash book and/or the bank statement. Teachers must clarify that the bank reconciliation statement is
simply used to show the difference between the bank balances of the cash book and the bank statement.
By so doing, a bank reconciliation statement can help spot errors in the cash book or the bank statement.
5
Most students have difficulty understanding why unpresented cheques and uncredited cheques are added
to and deducted from the cash book balance, respectively, in arriving at the bank statement balance.
Teachers should tell them the purpose is to reconcile both balances. The calculation would be reversed if
it starts with the bank statement balance and ends with the cash book balance.
6
The treatment of bank errors is the most difficult task. Teachers should spend more time demonstrating
how they should be shown on the bank reconciliation statement and explaining the general principle
behind this.
7
In public examinations, this topic is usually combined with other topics in a long question, most probably
the correction of errors, which will be taught in Chapter 6.
Q1
A bank overdraft occurs when a firm withdraws more money than it has in its bank account. As a result,
the balance at the bank will become negative.
Q2
A standing order is an instruction given by a bank customer to his bank to pay a fixed sum of money from
his account to a named beneficiary (payee) at regular intervals.
Example: A fixed amount of money is automatically transferred out of one’s bank account to pay property
management fees on a fixed date each month.
A direct debit is an authority given by the customer to a named payee to claim payments from the
customer’s bank account and an instruction to his bank to allow the payments to go through. It does not
specify the payment amount or the payment date.
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Example: Money is automatically transferred out of one’s bank account to pay electricity charges, but the
amount and the date of each transfer is not fixed.
Generally, a standing order is used when the bank customer needs to pay a fixed amount at regular
intervals. When payments are made at irregular intervals or are of variable amounts, a direct debit would
be used instead.
Q3
The reason may be one of the following:
• The drawer does not have enough money in the current account for the payment.
• There is no signature on the cheque, or the signature does not match the record at the bank.
• The amount in words differs from the amount in figures.
• The cheque is not dated.
• The cheque is a stale cheque (i.e., exceeding six months after the date of issue).
• The cheque is a post-dated cheque. This means that the date on the cheque has not yet been reached.
• The drawer’s account has been closed.
• Alterations to the cheque have not been countersigned by the drawer.
(Any two of the above)
Q4
A bank reconciliation statement is prepared at the end of a period in order to show the reasons for the
difference between the bank balances of the cash book and the bank statement.
Q5
Yes.
A bank reconciliation statement shows the reasons for the difference between the bank balances of the
cash book and the bank statement. The reasons may be errors and omissions made in the cash book or
the bank statement. So the preparation of a bank reconciliation statement can help to detect and correct
errors.
Q6
D Yuen
Bank Reconciliation Statement as at 30 November 2009
$
Overdraft balance as per cash book
Add Unpresented cheque
Credit transfer
Less
Uncredited cheque
Standing order
Bank charges
Overdraft balance as per bank statement
Q7
(a)
630
1,240
1,060
770
490
$
(3,780)
1,870
(1,910)
(2,320)
(4,230)
M Cheng
Bank Reconciliation Statement as at 31 March 2010
$
Balance as per bank statement
Add Bank lodgement not yet entered on bank statement
Bank error — Service fee overcharged
Less Unpresented cheque
Adjusted balance as per cash book
11,500
1,800
$
161,800
13,300
175,100
(16,400)
158,700
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(b)
M Cheng
Bank Reconciliation Statement as at 31 March 2010
$
Balance as per cash book
Add Unpresented cheque
Creditor — Stale cheque
Opening balance understated
Direct credit
16,400
12,000
10,000
18,600
Less
Bank lodgement not yet entered on bank statement
Bank error — Service fee overcharged
Debtor — Dishonoured cheque
Payment understated
Loan interest
Electricity — Direct debit
Balance as per bank statement
11,500
1,800
19,000
13,000
5,000
1,400
$
156,500
57,000
213,500
(51,700)
161,800
A2
When a firm keeps money in the bank, it is the same as the firm lending money to the bank. Therefore,
the firm’s positive bank balance is treated as a liability by the bank and not an asset.
A4
Adjusting entries in the drawer’s cash book:
Dr Cash book (bank column)
Cr Creditor’s account
ASSESSMENT
Short Questions
1
(a)
2009
Jun 30
" 30
Cash Book
Balance b/d
RS Ltd — Credit transfer
(b)
Union Credit — Standing order
Bank charges
Balance c/d
$
44
70
2,809
2,923
C Chan
Bank Reconciliation Statement as at 30 June 2009
Corrected balance as per cash book
Add Unpresented cheque
Less Uncredited cheque
Balance as per bank statement
$ 2009
2,833 Jun 30
90 " 30
" 30
2,923
$
2,809
57
2,866
(624)
2,242
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2
(a)
2008
Dec 31
" 31
Cash Book
K Sung — Direct credit
Balance c/d
(b)
$ 2008
180 Dec 31
4,007 " 31
" 31
4,187
Balance b/d
Mercantile Ltd — Standing order
Bank charges
C Hung
Bank Reconciliation Statement as at 31 December 2008
$
(4,007)
84
(3,923)
(211)
(4,134)
Corrected overdraft balance as per cash book
Add Unpresented cheque
Less Uncredited cheque
Overdraft balance as per bank statement
3X
(a)
2009
Mar 31
" 31
Cash Book
K Tong — Direct credit
Balance c/d
(b)
$ 2009
57 Mar 31
5,300 " 31
" 31
5,357
Balance b/d
BKS Ltd — Direct debit
Bank charges
$
(5,300)
490
(4,810)
(160)
(4,970)
Less Uncredited cheque
Overdraft as per bank statement
(a)
2009
May 31
" 31
$
5,280
49
28
5,357
K Woo
Bank Reconciliation Statement as at 31 March 2009
Overdraft as per corrected cash book
Add Unpresented cheque
4X
$
3,922
200
65
4,187
Cash Book
$ 2009
141,030 May 31
16,280 " 31
" 31
157,310
Balance b/d
Dividend revenue
(b)
$
4,800
820
151,690
157,310
DD Ltd
Bank Reconciliation Statement as at 31 May 2009
Adjusted balance as per cash book
Add Unpresented cheques ($2,790 + $16,270)
Less Uncredited deposit
Balance as per bank statement
C Yeung — Returned cheque
Bank charges
Balance c/d
$
151,690
19,060
170,750
(29,140)
141,610
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5
(a)
Cash Book
2009
Dec 31
" 31
" 31
" 31
Balance b/d
Dividend revenue (ii)
HK Finance Ltd — Refund (iv)
Transfer from savings a/c (v)
(b)
$
4,500
720
780
4,200
10,200
2009
Dec 31
" 31
" 31
" 31
Insurance — Standing order (i)
Bank charges (iii)
C Ho — Dishonoured cheque (vi)
Balance c/d
$
600
90
210
9,300
10,200
K Tang
Bank Reconciliation Statement as at 31 December 2009
$
9,300
1,620
10,920
(2,070)
8,850
Corrected balance as per cash book
Add Unpresented cheques ($750 + $870)
Less Uncredited cheque
Balance as per bank statement
Application Problems
6
(a)
Cash Book
2010
Apr 30
" 30
"
"
30
30
Balance b/d
Cheque wrongly recorded on
credit side ($6,200 × 2) (iv)
Credit transfer (v)
Dividend revenue (vii)
(b)
$ 2010
53,000 Apr 30
" 30
12,400 " 30
5,800 " 30
1,190
72,390
Bank charges (i)
Rent — Standing order (ii)
Debtor — Dishonoured cheque (iii)
Balance c/d
$
150
20,000
3,560
48,680
72,390
Panda Club
Bank Reconciliation Statement as at 30 April 2010
Corrected balance as per cash book
Add Loan interest undercharged
Unpresented cheque
Balance as per bank statement
or
$
48,680
2,400
700
51,780
(vi)
(viii)
Panda Club
Bank Reconciliation Statement as at 30 April 2010
Balance as per bank statement
Less Loan interest undercharged
Unpresented cheque
Corrected balance as per cash book
$
51,780
(2,400)
(700)
48,680
(vi)
(viii)
(c) See text, Section 4.5 of Frank Wood’s Introduction to Accounting.
7X
(a)
2009
Oct 31
" 31
" 31
Cash Book
Balance b/d
Dividends received (iv)
Rates refund ($5,500 × 2) (v)
$
76,230
930
11,000
88,160
2009
Oct 31
" 31
" 31
" 31
Debtor — Dishonoured cheque (vi) Insurance (vii) Discounts allowed (viii) Balance c/d
$
2,720
8,250 30
77,160
88,160
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(b)
Glory Ltd
Bank Reconciliation Statement as at 31 October 2009
$
Adjusted balance as per cash book
Add Unpresented cheque
(ii)
Less
Uncredited deposits
Bank error ($10,000 × 2)
Balance as per bank statement
(i)
(iii)
5,650
20,000
$
77,160
1,840
79,000
(25,650)
53,350
(c) The reason could be:
(i) The creditor had not deposited the cheque into his bank account.
(ii) The cheque had been deposited but had not yet been processed by the bank by the end of the
period.
8
(a)
Cash Book
2010
Mar 31
" 31
"
"
31
31
Balance b/d
Paul Lee — Incorrect amount
entered (ii)
Peter Pang — Credit transfer (v)
Sales receipts omitted (viii)
(b)
$ 2010
93,596 Mar 31
" 31
1,080 " 31
3,256 " 31
2,504 100,436
Bank interest charges (iii)
Rates — Autopay (iv)
David Ho — Dishonoured cheque (vi)
Balance c/d
$
184
2,688
2,080
95,484
100,436
Anne Lo
Bank Reconciliation Statement as at 31 March 2010
Balance as per bank statement
Add Uncredited cheque
$
91,600
8,744
100,344
(4,860)
95,484
(vii)
Less Unpresented cheques
Corrected balance as per cash book
(i)
(c)In Hong Kong, when a cheque is deposited into the bank, it takes at least one full working day for the
cheque to clear. As the cheque was deposited on 31 March 2010, it would only be cashed in early
April 2010. Thus, it did not appear on the bank statement for the month ended 31 March 2010.
9X
(a)
2010
Dec 31
" 31
" 31
" 31
" 31
Cash Book
Balance b/d
Dividend revenue (ii)
Mr Sin (v)
Thomas Wong (v)
Cheque received from Mr Ma
previously recorded on the
credit side ($3,360 × 2) (viii)
$
137,900
1,365
3,210
2,530
6,720
151,725
2010
Dec 31
" 31
" 31
" 31
Trade subscription (iii)
Interest expenses (iv)
Mr Wo — Dishonoured cheque (vi)
Balance c/d
$
11,060
210
1,246
139,209
151,725
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(b)
Bank Reconciliation Statement as at 31 December 2010
$
Corrected balance as per cash book
Add Unpresented cheques: Mr Ma
Mr Man
$
139,209
(i)
860
190
Less Overdraft interest wrongly charged Balance as per bank statement
(vii)
1,050
140,259
(840)
139,419
or
Bank Reconciliation Statement as at 31 December 2010
Balance as per bank statement
Add Overdraft interest wrongly charged
(vii)
Less Unpresented cheques
Corrected balance as per cash book
10
(a)
$
139,419
840
140,259
(1,050)
139,209
(i)
Cash Book
2010
May 7
" 10
" 29
" 31
$
1,630
10,000
555
280
Sales
Capital
AB Ltd
Dividend revenue (ii)
2010
May 1
"
4
" 18
" 30
" 31
" 31
" 31
" 31
Balance b/d
Van
D Ming Ltd
Wages
Bank charges (i)
Insurance — Standing order (iv)
Sales — Dishonoured cheque (v)
Balance c/d
12,465
(b)
$
3,340
5,000
237
470
110
920
75
2,313
12,465
B Mok
Bank Reconciliation Statement as at 31 May 2010
Adjusted balance as per cash book
Add Unpresented cheque
$
2,313
237
2,550
(555)
1,995
(vi)
Less Uncredited cheque
Balance as per bank statement
(iii)
(c) See text, Section 4.4.
11X
(a) No. A bank reconciliation statement is prepared to explain the difference between the bank balances
of the cash book and the bank statement.
(b) (i)
2009
Mar 31
Cash Book
Balance c/d
(found in the bank reconciliation
statement)
$ 2009
24,275 Mar 31
" 31
" 31
"
"
24,275
31
31
Balance b/f (balancing figure)
Creditor ($5,280 + $5,016) (iii)
Chung Hwa Ltd ­—
Dishonoured cheque (v)
Overdraft interest (vi)
Electricity (vii)
$
5,894
10,296
2,484
862
4,739
24,275
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(ii)
Bank Reconciliation Statement as at 31 March 2009
$
Adjusted bank balance as per cash book (balancing figure)
Add Personal cheque wrongly deposited into bank
Unpresented cheques
Less Lodgement not yet entered on bank statement
Overdraft balance as per bank statement
(i)
(ii)
1,320
11,763
(iv)
$
(24,275)
13,083
(11,192)
(3,180)
(14,372)
(iii)The bank balance to be shown in the balance sheet as at 31 March 2009 would be $24,275
(overdraft).
12
(a)
Cash Book
2009
Feb 28
" 28
Balance b/d
Jasper Ltd — Credit transfer
(b)
$ 2009
2,716 Feb 28
1,375 " 28
" 28
" 28
" 28
4,091
Bank charges
Government rates — Direct debit
Jacob Co — Dishonoured cheque
Trade subscriptions — Standing order
Balance c/d
$
562
231
350
375
2,573
4,091
Amy Ko
Bank Reconciliation Statement as at 28 February 2009
$
Balance as per bank statement
Add Uncredited item
Unpresented cheques:
Telephone (No. 4149)
Wages (No. 4152)
Corrected balance as per cash book
$
1,429
2,000
3,429
Less
(c)
106
750
(856)
2,573
Accounts Receivable Ledger
Jacob Co
2009
Feb 1
" 28
13X
Balance b/d
Bank — Dishonoured cheque
$ 2009
719 Feb 24
350 " 28
1,069
Bank
Balance c/d
$
350
719
1,069
(i) Bank receipts and payments should be recorded in the cash book on the dates that they are made.
This is the time when the corresponding liability is settled. For example, a cheque payment should be
recorded when the cheque is drawn and not when it is presented to the bank. Making entries on the
basis of the bank statement could miss some cheques that have been drawn but have not been
presented during the period.
(ii) These items are usually debited or credited automatically to the bank account without prior
notification. The account holder can only ascertain these items upon receiving the bank statement.
(iii) Actually, these cheques or deposits were recorded in the cash book when they were drawn or made.
Adjustments for such items are just for the purpose of explaining the difference between the bank
balances of the cash book and the bank statement.
(iv) As explained in part (i), bank receipts and payments should be recorded in the cash book when they
are made. So the bank balance shown in the balance sheet should be the adjusted balance of the cash
book.
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Past Exam Questions
14
(a)
2006
Mar 31
" 31
" 31
Cash Book
$
225,000
800
6,600
Balance b/f
Trade creditors (i)
Credit transfer (vii)
2006
Mar 31
" 31
" 31
" 31
232,400
(b)
$
Dishonoured cheque (iii)
6,800
Payment to supplier ($2,750 × 2) (iv)
5,500
Standing order — Rent (viii)
34,000
Balance c/f
186,100
232,400
Bank Reconciliation Statement as at 31 March 2006
$
Balance as per corrected cash book
Add Unpresented cheque
Less
Overdraft interest wrongly debited
Uncredited cheque
Balance as per bank statement
(v)
(ii)
(vi)
1,000
20,150
$
186,100
1,400
187,500
(21,150)
166,350
(c) (i) To discover any errors or irregularities, and
(ii) To detect any missing transactions in the cash book.
15X (a)
2006
Dec 31
" 31
Cash Book
$ 2006
186,400 Dec 31
3,900 " 31
" 31
" 31
" 31
190,300
Balance b/d
Trade debtors (vii)
(b)
$
7,800
2,660
19,000
6,000
154,840
190,300
Trade debtors (i)
Overdraft interest (ii)
Trade debtors (iv)
Insurance (vi)
Balance c/d
Bank Reconciliation Statement as at 31 December 2006
$
Balance as per corrected cash book
Add Unpresented cheques Bank errors Less Uncredited deposit Balance as per bank statement
(iii)
(viii)
(v)
8,800
20,000
$
154,840
28,800
(36,680)
146,960
(c) A bank reconciliation statement provides:
(i) verification of firm’s records with aspects ‘not yet known’ by the bank such as uncredited
deposits and unpresented cheques.
(ii) verification of the amounts recorded as received and paid.
(iii) a check on the time differences between when a deposit is recorded as received (or paid) and
when it is banked (or withdrawn from bank).
(iv) an update of the firm’s records with aspects ‘not yet known’ by the firm, that is, direct deposits
such as interest received, direct withdrawals such as bank fees and dishonoured cheques.
(v) a check for errors in either the firm’s records or the bank’s records (as reported in the bank
statement).
(Any one point)
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16
(a)
2007
Mar 31
" 31
" 31
Cash Book
Balance b/d
Dishonoured cheque (vi)
Credit side overstated (viii)
$
235,930
5,100
15,600
2007
Mar 31
" 31
" 31
" 31
Salary (iii)
Machinery ($17,000 – $10,700) (iv)
Bank charge (vi)
Balance c/d
256,630
(b)
Bank Reconciliation Statement as at 31 March 2007
$
Balance as per corrected cash book
Add Unpresented cheques:
Cheque drawn by Mr Chan
Cheque paid to Mr Luk
Less
$
33,870
6,300
100
216,360
256,630
Uncredited deposit
Overdraft interest wrong charged
Balance as per bank statement
(i)
(v)
5,650
6,320
(ii)
(vii)
2,000
1,400
$
216,360
11,970
(3,400)
224,930
(c) A bank reconciliation statement provides:
(i)verification of firm’s records with aspects ‘not yet known’ by the bank such as uncredited
deposits and unpresented cheques.
(ii) verification of the amounts recorded as received and paid.
(iii)a check on the time differences between when a deposit is recorded as received (or paid) and
when it is banked (or withdrawn from bank).
(iv)an update of the firm’s records with aspects ‘not yet known’ by the firm, that is, direct deposits
such as interest received, direct withdrawals such as bank fees and dishonoured cheques.
(v)a check for errors in either the firm’s records or the bank’s records (as reported in the bank
statement).
(Any two points)
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