Our Confession
ACT 110
Is EASY POP!
Because, Death and Life is in the
Power of the Tongue!
Lecture Notes 8
Bank Reconciliation
Bank Reconciliation
Introduction
• Monies deposited in and paid out of the business’s bank
account are usually recorded in the Bank Column of the
cash Book.
• The bank also keeps such a record of items deposited
and paid from the account, which should obviously
match with the business’ record.
• However, there might be items paid into and out of our
account at the bank which we have not recorded in the
cash book.
Bank Reconciliation
Introduction
• To see what these are we need a copy of our account
kept at the bank which is called a “Bank Statement”.
• Bank Statement – a monthly statement of account mailed
by a bank to each of its customers with checking or other
accounts, recording the banking transactions and current
balance during a period and usually including canceled
checks.
• There may also be items that are recorded in the cash
book, but not showing up on the bank account.
• As such, a Bank Reconciliation Statement should be
prepared in order determine why there is a difference.
Bank Reconciliation
Definition
• Made up of two (2) words “Bank” & “Reconciliation”
• Bank – Closing balances on
– Bank Column of the Cash Book
– Bank Statement balance of the business’ bank account
• Reconciliation - is a process that comes from the root
“To Reconcile”, which means:
– To Make agree
– To explain disagreement in order to make aagree
– To bring into agreement or harmony; make compatible or
consistent: to reconcile differing statements; to reconcile
accounts.
Bank Reconciliation
Definition
• A calculation comparing the cash book with the bank
balance.
• It should show whether or not errors have been made
either in the bank columns of the cash book or on the
bank statement.
• It is not a statement of double entry but just one
explaining the difference between the bank balance and
the cash book bank column.
Bank Reconciliation
Why do we need it?
• The bank reconciliation statement is drawn up so as to
cause the bank balance as shown by the bank statement
to agree with the bank balance as shown by the bank
column of the cash book.
• The purpose of a bank reconciliation statement in
addition to determining the items responsible for the
difference is to ascertain the correct bank balance as at
a specific time and date, since the bank balance is
needed for the balance sheet.
Bank Reconciliation
Reasons for Differences
• Reasons for difference between the two sources of
information are broadly categorised as:
– Timing difference,
– Informational Difference
– and Errors.
Bank Reconciliation
Reasons for Differences
• Specific factors responsible for cash book balance and
balance as shown by the bank statement being
different:1.
2.
3.
4.
5.
Deposits in transit
Unpresented cheques
Bank charges
Bank credits
Bank or depositor’s errors
Bank Reconciliation
Deposits in Transit
• Cash deposits made at the end of the month into the
businesss’ bank in one month but received and
recorded by the bank in the following month.
• Deposits in transit at the end of one months would be
included in the next month bank state therefore it must
be deducted from the deposits for the month as per
bank statement to ascertain those deposits received
during the month for that month.
Bank Reconciliation
Unpresented Cheques
• These are cheques which have been paid and
dispatched to individuals or business, but which have
not been presented for payment at the payer’s bank.
• In effect these are items that are entered on the credit
side of the cash book and had not yet been entered in
the bank’s records.
• Unpresented cheques at the end of one month may be
presented during the next month.
Bank Reconciliation
Unpresented Cheques
• Those presented outstanding cheques from the previous
period must be deducted from the cheques received
during the month to derive those cheques paid and
encashed at the bank during the month under
consideration.
Bank Reconciliation
Bank Charges
• These are charges which have been dispatched to the
depositor’s balance for such items as:
–
–
–
–
Bank Services,
Printing Cheques,
Safe Deposit Rentals
and Not Sufficient Funds (NSF) Cheques.
• The depositor may not be aware of these charges until
the receipt of the bank statement.
Bank Reconciliation
Bank Credits
• Collection or deposits by the bank for the benefit of the
account holder that may not be known to them until the
bank statement is received.
Bank or Depositors Errors
• Errors on either the part of the bank or the part of the
depositor causing the bank balance to disagree with the
depositor’s book balance.
Bank Reconciliation
Standing Order
• A standing order is a request by a customer for the bank
to make payments to third parties on a periodic basis.
• The customer records the transaction in his books on
receipt of his bank statement, as he is unaware as to
when or if the bank had made the payment on his
behalf.
Our Confession
ACT 110
Is EASY POP!
Because, I am taking responsibility
for my own Success or Failure!
Bank Reconciliation
Model
NAME
BANK RECONCILIATION STATEMENT FOR MONTH, YEAR
BALANCE AS PER CASH BOOK
000
BALANCE AS PER Bank Statement
Add:
Add:
Note Collectible,
Direct Deposit Bank Credit
Deposits in transit
Interest on Note
Interest Earned
Cash Book Error: Understated Deposit
Cash Book Error: Overstated Cheque
00
00
00
00
00
Cash Book Error: Omitted Deposit
00
Bank Error: Understated Deposit
Bank Error: Overstated Cheque
Bank Error: Incorrect Deductions
Bank Error: Omitted Deposit
000
00
00
00
00
00
000
000
000
000
Bank Reconciliation
Model
NAME
BANK RECONCILIATION STATEMENT FOR MONTH, YEAR
BALANCE AS PER CASH BOOK
000
BALANCE AS PER Bank Statement
Add:
Add:
“Additions”
“Additions”
Less:
Bank Charges
Less:
Unpresented Cheques
Standing Order
Interest Paid
Dishonoured Cheques
Cash Book Error: Overstated Deposit
Cash Book Error: Understated Cheque
00
00
00
00
00
00
Cash Book Error: Omitted Cheque
00
Corrected Cash Book Balance
Bank Error: Overstated Deposit
Bank Error: Understated Cheque
Bank Error: Incorrect Increases
00
00
00
00
Bank Error: Omitted Cheque
00
000
(000)
(000)
000
Corrected Bank Statement Balance
000
Bank Reconciliation
Dishonoured Cheques
• When a cheque is received from a customer and paid
into the bank, it is recorded:
– Debit Side of the Cash Book Bank Column
– Credit Side of the Bank Statement.
• If at a later date the customers bank refuses to pay us
the amount due on the cheque – This is known as a
Dishonoured Cheque.
Bank Reconciliation
Dishonoured Cheques
• There are several reasons for this as shown in this
example –
– Let us suppose that K. King gave us a cheque for $5,000
on May 20, 2002. We bank it and a few days later the
bank returns the cheque to us.
1. Figures and Words Don’t Match – “If King had put
$5,000 in figures, but had written in words five
thousand five hundred dollars on the cheque”
– This cheque would not be honoured by the bank and
would have to be returned to King for amendment.
Bank Reconciliation
Dishonoured Cheques
• There are several reasons for this as shown in this
example –
– Let us suppose that K. King gave us a cheque for $5,000
on May 20, 2002. We bank it and a few days later the
bank returns the cheque to us.
2. Stale Dated Cheques – Cheques are considered stale
dated after six (6) months after the date on the
cheque. The bank will not pay cheques 6 months old.
• “If King had put 2001 on the cheque instead of 2002
then the cheque would be returned by the bank.”
Bank Reconciliation
Dishonoured Cheques
• There are several reasons for this as shown in this
example –
– Let us suppose that K. King gave us a cheque for $5,000
on May 20, 2002. We bank it and a few days later the
bank returns the cheque to us.
3. Not Sufficient Funds Cheques – “If King only had a
balance of $2,000 in his account the bank will not
honour the cheque of $5,000 because it will result in a
overdraft on his account.”
• The bank will write on the cheque “refer to drawer”
and return in to us as a dishonoured cheque.
Bank Reconciliation
Dishonoured Cheques
Accounting Entries
K. King
2002
May 1
2002
Balance b/d
May 25 Bank: Dis Chq
5,000 May 20 Bank
5,000
5,000
Bank Account
2002
May 20 K King
2002
5,000 May 25 Bank: Dis Chq
5,000
Bank Reconciliation
Bank Overdraft
• An overdraft occurs when money is withdrawn from a
bank account and the available balance goes below
zero.
• In this situation the account is said to be "overdrawn".
• It is shown by a credit balance in the cash book or a
debit balance on the bank statement.
• The adjustment needed to reconcile the bank overdraft
is the complete opposite of an account that is not
overdrawn.
Bank Reconciliation
Bank Overdraft – Comparison
Balance/Overdraft as per cash book
Adjustments
Unpresented Cheques
Bank lodgments
Balance/Overdraft per Bank Statement
Balances
$
0000
Plus
Less
0000
Overdraft
$
0000
Less
Plus
0000