FINANCIAL
ACCOUNTING
Week 10: Lecture 10
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LEARNING GOALS
By the end of the lecture you will be able to:
 Understand the purpose of the Bank Reconciliation
Statement
 Be familiar with the nature of the Cash Book and Bank
Statement
 Identify the reasons for differences between the Cash
Book and the Bank Statement Balance
 Solve Exercises
2
3
THE PURPOSE OF THE BANK
RECONCILIATION STATEMENT
The purpose of the Bank Reconciliation is to reconcile
(resolve – make two parts agree) the difference between:



The cash book balance : the company’s records of its bank
account transactions
and
The bank statement balance : the bank’s records of the bank
account transactions that the company is doing
The content of the cash book should be exactly the same as the
record provided by the bank (bank statement) and therefore the
records in the cash book should also appear in the bank
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statement.
THE PURPOSE OF THE BANK
RECONCILIATION STATEMENT
 Due
to the timing difference, omissions and
errors made by the bank or the firm itself , the
balance of the bank statement and the bank
account in the cash book rarely agree.
 Bank reconciliation statements can be used to
explain the reasons for the differences and to
identify errors and omissions in both
documents, so that corrections can be made as
soon as possible.
THE
RECONCILIATION
IS
CARRIED
FREQUENTLY , USUALLY AT A MONTHLY BASIS
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The debits and credits in the cash book are
reversed(opposite) in the bank statements
because the bank will be recording the
transaction from its point of view :
 When there is an increase in the company’s money the
accountant of the company makes a debit entry in
the cash book but the Bank makes a credit entry
because this increase in money is a liability for the
Bank to the company or the individual customer.
 When there is a reduce in the company’s money the
accountant of the company makes a credit entry in
the cash book but the Bank makes a debit entry
because this reduction in money is a decrease of the
liability- obligation that the Bank has to the company
or the individual customer.
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NATURE OF THE CASH BOOK AND BANK
STATEMENT
Cash Book
Debit represents an increase
Credit represents a decrease
Bank Statement
Dr
Cr
Balance
(represents
decrease)
(represents
increase)
(represents
the amount
owned to
the clients
- liability)
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8
BANK RECONCILIATION STATEMENT
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REASONS
FOR DIFFERENCES BETWEEN
THE CASH BOOK BALANCE AND THE
BANK STATEMENT BALANCE
1) 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
* dishonored cheques
* interest allowed by the bank: interest received
for deposits.
They are not recorded in the Cash Book because the
business does not know that these items have arisen
until they see the Bank Statement.
The Cash Book must be adjusted to reflect these items!!!
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2) 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
given to suppliers but they have not presented to
the bank for money.
* Outstanding / uncleared
deposits: cheques
received by the business but not yet cleared by the
bank.
The bank statement balance needs to be adjusted for these
items:
€
Balance per Bank Statement
X
Less: Outstanding / Unpresented cheques (X)
Add: Outstanding / Unpresented deposits
X
Balance per cash book revised
X
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3)
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
NOTE THAT THE BANK BALANCE ON THE
STATEMENT OF FINANCIAL POSITION IS ALWAYS
THE BALANCE PER THE REVISED CASH BOOK
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Other methods of payment except from cheques are:
 The Standing orders (S/O):
They are standing instructions from the firm to the
bank to make regular payments. For example paying
every month a loan installment.

Direct debit or autopay:
Is the instruction given by the depositor to his / her
creditor’s bank to collect the money with a variable
amount directly from the depositor’s bank account from
time to time.

Direct credit:
They are money received from customers directly
through the banking system.
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EXERCISE 1:
On which side of the cash book should the following
unrecorded items be posted?






Bank charges
Standing orders
Direct Debits
Direct Credits
Dishonored cheques
Bank interest allowed
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SOLUTION:
Cash Book
Bank Interest allowed
Bank Charges
Direct Credits
Direct Debits
Standing Orders
Dishonored cheques
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EXERCISE 2:
In preparing a company’s bank reconciliation statement,
the accountant finds that the following items are causing
a difference between the cash book balance and bank
statement balance:
1) Direct Debit €530
2) Deposits not credited €1200
3) Cheque paid in by the company and dishonored €234
4) Outstanding cheques €677
5) Bank charges €100
6) Error by Bank €2399 – cheque incorrectly credited to
the account
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SOLUTION:
Which of these items will require an entry in the
cash book?
A) 3,4 and 6
B) 1,3 and 5
C) 1,2 and 4
D) 2,5 and 6
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TO RECONCILE THE BANK STATEMENT
WITH THE UNADJUSTED CASH BOOK
Two steps :
1. Check the bank statement and the cash book
to identify the items which have been omitted.
2. Prepare the bank reconciliation statement.
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EXERCISE 3:
The following information has been extracted from the
records of J.Franco:
DR
Bank Account
CR
€
cheque no. €
1 Dec B/ce b/d 16491 1 Dec Alexander 782
857
2 Dec Able
6 Dec Burgess 783
221
Baker
2065 14 Dec Barry
784
511
10 Dec Charlie 2312 17 Dec Cook
785
97
14 Dec Delta
419 24 Dec Hay
786
343
21 Dec Echo
327 29 Dec Rent
787
260
23 Dec Cash Sales 529
31 Dec Fred-chq
119 31 Dec B/ce c/d
19973 19
22262
22262
High Street Bank
Bank statement – J.Franco
Date
Details
Dr
1 dec
5 dec
5 dec
6 dec
10 dec
11 dec
13 dec
17 dec
17 dec
17 dec
17 dec
28 dec
30 dec
31 dec
Cr
withdrawals
deposits
€
€
B/ce b/d
782
bank charges
deposit
standing order
783
deposit
784
deposit
deposit
deposit
786
310923
B/ce c/d
Balance
€
16491
857
47
2065
137
212
2312
511
419
327
528
343
297
15587
17652
17515
17303
19616
19104
19523
19850
20387
20035
19738
19738
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SOLUTION:
Revised /corrected Cash Book
B/ce as per wrong cash book 19973 5/12 bank charges
47
11/12 cheque 783 error
9 10/12 S/O
137
17/12 deposit differ
1
B/ce c/d revised 19797
19982
19982
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Bank Reconciliation Statement as at 31st December
€
Balance as per Bank Statement
19738
Add: 31/12 Outstanding Deposit- Fred
119
Less: 6/12 Outstanding cheque 785
(97)
Less: 29/12 Outstanding cheque 787
(260)
Add: 30/12 Bank Error: wrong cheque 310923 297
Balance per Cash Book
19797
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EXERCISE 4:
The following is a summary of Ami’s cash book as
presented to you for the month of December’2012:
Cash Book
€
Receipts
B/ce c/d
€
1469 B/ce b/d
761
554 Payments
1262
2023
2023
All receipts are banked and payments are made by cheque.
On investigation discovered:
1)Bank charges of €136 entered on the bank statement had
not been entered in the cash book.
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2)Cheques drawn amounting to €267 had not been
presented to the bank for payment.
3) A cheque for €22 had been entered as a receipt in the
cash book instead of as a payment.
4) A cheque drawn for €6 had been incorrectly entered in
the cash book as €66.
Required: prepare the revised cash book.
Solution:
Revised Cash Book
Adjustment for cheque 60 B/ce b/d
Bank charges
B/ce c/d
674 Cheque
734
B/ce b/d
554
136
44
734
674
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QUESTIONS?
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