Bank Reconciliation
Introduction
• The objective of a bank reconciliation is to
reconcile the difference between:
– the cash book balance, i.e. the business' record of
their bank account, and
– the bank statement balance, i.e. the bank's record of
the bank account.
• The debits and credits are reversed in bank
statements because the bank will be recording
the transaction from its point of view, in
accordance with the business entity concept.
Reasons to Prepare a Bank
Reconciliation Statement
• The cash book records all transactions with
the bank. The bank statement records all the
bank's transactions with the business.
• The contents of the cash book should be
exactly the same as the record provided by
the bank in the form of a bank statement, and
therefore the business' records should
correspond with the bank statement.
• This is in fact so, but with three important conditions:
– The ledger account maintained by the bank is the opposite way
round to the cash book. This is because the bank records
balances from their perspective. Therefore if a client has a
positive bank balance the bank would display this as a credit
balance because they have a liability to pay it back to the client.
If the client is overdrawn this would be shown as a debit
because the bank are owed a repayment from the client.
– Timing differences must inevitably occur. A cheque payment is
recorded in the cash book when the cheque is dispatched. The
bank only records such a cheque when it is paid by the bank,
which may be several days later.
– Items such as interest may appear on the bank statement but
are not recorded in the cash book as the business is unaware
that they have arisen.
Differences between the Bank
Statement and the Cash Book
• When attempting to reconcile the cash book
with the bank statement, there are three
differences between the cash book and bank
statement:
– unrecorded items
– timing differences
– errors
Unrecorded Items
• These are items which arise in the bank
statements before they are recorded in the cash
book. Such 'unrecorded items' may include:
– interest
– bank charges
– dishonoured cheques.
• They are not recorded in the cash book simply
because the business does not know that these
items have arisen until they see the bank
statement.
Timing differences
• These items have been recorded in the cash
book, but due to the bank clearing process
have not yet been recorded in the bank
statement:
– Outstanding/unpresented cheques (cheques sent
to suppliers but not yet cleared by the bank).
– Outstanding/uncleared lodgements (cheques
received by the business but not yet cleared by
the bank).
Outstanding payments and receipts
Outstanding or unpresented cheques
• Suppose a cheque relating to a payment to a supplier of a company is
written, signed and posted on 29 March. It is also entered in the cash book
on the same day. By the time the supplier has received the cheque and
paid it into his bank account, and by the time his bank has gone through
the clearing system, the cheque does not appear on the sender's
statement until, say, 6 April. The sender would regard the payment as
being made on 29 March and its cash book balance as reflecting the true
position at that date.
Outstanding deposits/lodgements
• In a similar way, a trader may receive cheques by post on 31 March, enter
them in the cash book and pay them into the bank on the same day.
Nevertheless, the cheques may not appear on the bank statement until 2
April. Again the cash book would be regarded as showing the true
position. Outstanding deposits are also known as outstanding lodgements.
• The bank statement balance needs to be adjusted
for these items:
Rs.
Balance per bank statement
X
Less: Outstanding/unpresented cheques (X)
Add: Outstanding/uncleared lodgements X
–––
Balance per cash book (revised)
X
Errors
Errors in the cash book
• The business may make a mistake in their cash
book. The cash book balance will need to be
adjusted for these items.
Errors in the bank statement
• The bank may make a mistake, e.g. record a
transaction relating to a different person within
our business' bank statement. The bank
statement balance will need to be adjusted for
these items.
Proforma Bank Reconciliation
Cash book
Bal b/f
Adjustments
Revised bal c/f
Revised bal b/f
X
X
X
–––
X
–––
X
Bal b/f
Adjustments
Revised bal c/f
Revised bal b/f
X
X
X
–––
X
–––
X
Bank reconciliation statement as at …..
Balance per bank statement
Outstanding cheques
Outstanding lodgements
Other adjustments to the bank statement
Balance per cash book (revised)
Rs.
X
(X)
X
X/(X)
–––––
X
• Beware of overdrawn balances on the bank
statement.
• Beware of debits/credits to bank statements.
• Beware of aggregation of deposits in a bank
statement.
• Note that the bank balance on the statement
of financial position is always the balance per
the revised cash book.
Example 1
• A business has a debit balance on its cash book of
Rs.40,400. In reconciling the cash book balance with
the bank statement balance, it is discovered that the
bank statement does not show cheques received and
banked from customers of Rs.8,000, or cheque
payments to suppliers for Rs.14,000.
• The bank statement also shows bank charges of
Rs.1,200 and a direct debit payment of Rs.4,600. None
of these items have yet been recorded in the cash
book.
Required:
– Revised cash book balance
– Bank statement balance
Example 2
• A business bank statement at 31 October 20XX
shows a positive balance of Rs.26,800. You
subsequently discover that the bank has
dishonoured a customer’s cheque for Rs.600 and
has charged bank charges of Rs.100, neither of
which are recorded in the cash book.
• Also there are unpresented cheques totalling
Rs.2,800.
• Required
– Cash book balance
– Revised cash book balance
Following are the bank column of the cash book and the bank statement received from the bank for “Hiru” limited for the month of May 2014.
Date
2014/5/1
2014/5/12
2014/5/25
2014/5/25
2014/5/26
Description
Balance B/F
Dilhani
(400100)
Sadaharitha
(139786)
Somaweera
Brothers
(325556)
BQ Trasers
(400321)
Rs.
Date
444,000 2014/5/4
100,000 2014/5/10
95,000 2014/5/15
20,000 2014/5/25
70,000 2014/5/25
2014/5/25
2014/5/31
729,000
Description
Amal (100100)
Expenses
(100101)
AB Limited
(100102)
Kumara & Sons
(100103)
Rs.
150,000
25,000
Himalee
Transport Ltd
(100104)
Kumara & Sons
(100103)
Bala B/C/d
50,000
80,000
115,000
115,000
194,000
729,000
Hiru Limited
Bank Statement for the month of May 2014
Date
Description
201/05/01
Balance B/F
2014/05/1
1
Payment (100101)
2014/05/1
3
Cheque Deposit
2014/05/1
6
Payment (100100)
2014/05/1
6
Sandaru products
200b
"000
569"000
Dividends
78"000
647"000
95"000
742"000
2014/05/2
7
Cheque
(139786)
Debit (Rs.)
Balance (Rs.)
444"000
25"000
419"000
100"000
150"000
Deposit
Payment (100103)
2014/05/2
8
2014/05/3
1
2014/05/3
1
Credit (Rs.)
115"000
519"000
369"000
627"000
Standing Order (Bank 60"000
Loan Installment)
Bank Charges
1"000
567"000
Debit tax
564"800
1"200
566"000
• Kay Rogan’s Cash Book at 30th November 2014 showed an
overdrawn position of Rs.3,630 which did not match with
her bank statement. Detailed examination of the two
records revealed the following:
• The debit side of the cash book had been undercast by
Rs.300.
• A cheque for Rs.1,560 in favour of Z Suppliers Ltd., had
been omitted by the bank from its statement, the cheque
having been debited to another customer’s account.
• A lodgement of Rs.1080 on 30th November had not been
credited by the bank.
• Interest amounting to Rs.228 had been debited by the bank
but not entered in the cash book.
• Kay Rogan’s Cash Book at 30th November 2014 showed an overdrawn position of
Rs.3,630 although her bank statement showed only Rs.2,118 overdrawn. Detailed
examination of the two records revealed the following:
(a) The debit side of the cash book had been undercast by Rs.300.
(b) A cheque for Rs.1,560 in favour of Z Suppliers Ltd., had been omitted by the bank
from its statement, the cheque having been debited to another customer’s account.
(c) A cheque for Rs.182 drawn in payment of the telephone account had been entered
in the cash book as Rs.128 but was shown correctly on the bank statement.
(d) A cheque for Rs.210 from A. brooks having been paid into the bank was
dishonoured and shown as such on the bank statement although no entry relating to
the dishonour had been made in the cash book.
(e) The bank had debited a cheque for Rs.126 to Kay’s account in error; it should have
been debited by them to Ray Kogan’s account.
(f) A dividend of Rs.90 on Kay’s holding of Ordinary Shares has been paid direct to
her bank account and no entry made in the cash book.
(g) Cheques totaling Rs.1260 drawn on 29th November had not been presented for
payment
(h) A lodgement of Rs.1080 on 30th November had not been credited by the bank.
(i) Interest amounting to Rs.228 had been debited by the bank but not entered in the
cash book.