ACT 110Is EASY

POP!

Our Confession

Because, Death and Life is in the Power of the Tongue!

Bank ReconciliationLecture Notes 8

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. Deposits in transit2. Unpresented cheques3. Bank charges4. Bank credits5. 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.

ACT 110Is EASY

POP!

Our Confession

Because, I am taking responsibility for my own

Success or Failure!

Bank ReconciliationModel

NAMEBANK RECONCILIATION STATEMENT FOR MONTH, YEAR

BALANCE AS PER CASH BOOK 000

Add:Note Collectible, Direct Deposit Bank Credit 00Interest on Note 00Interest Earned 00Cash Book Error: Understated Deposit 00Cash Book Error: Overstated Cheque 00Cash Book Error: Omitted Deposit 00 000 000

BALANCE AS PER Bank Statement 000

Add:Deposits in transit 00Bank Error: Understated Deposit 00Bank Error: Overstated Cheque 00Bank Error: Incorrect Deductions 00Bank Error: Omitted Deposit 00 000 000

Bank ReconciliationModel

NAMEBANK RECONCILIATION STATEMENT FOR MONTH, YEAR

BALANCE AS PER CASH BOOK 000

Add:“Additions”

Less:Bank Charges 00Standing Order 00Interest Paid 00Dishonoured Cheques 00Cash Book Error: Overstated Deposit 00Cash Book Error: Understated Cheque 00Cash Book Error: Omitted Cheque 00 (000) Corrected Cash Book Balance 000

BALANCE AS PER Bank Statement 000

Add:“Additions”

Less:Unpresented Cheques 00Bank Error: Overstated Deposit 00Bank Error: Understated Cheque 00Bank Error: Incorrect Increases 00Bank Error: Omitted Cheque 00 (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 ReconciliationDishonoured ChequesAccounting Entries

2002 2002

K. King

May 1 Balance b/d 5,000 May 20 Bank 5,000

May 25 Bank: Dis Chq 5,000

2002 2002

Bank Account

May 20 K King 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 – ComparisonBalances

Overdraft $ $

Balance/Overdraft as per cash book 0000 0000Adjustments

Unpresented Cheques Plus LessBank lodgments Less Plus

Balance/Overdraft per Bank Statement 0000 0000