CHAPTER SEVEN

BANK Reconciliation

Learning Objectives

Explain bank facilities

Differentiate Cash Book balance and Bank Statement balance

Explain the importance of a Bank Reconciliation Statement

Prepare the Bank Reconciliation Statement

Bank facilities • Bank plays the role of financial institution that gives

monetary services. • In Malaysia there are there are local and international banks

as follows;Banks In Malaysia

- Maybank - Bumiputera Commerce (CIMB)- Southern Bank (CIMB)- Public Bank- EON Bank- Alliance Bank- Affin Bank- RHB Bank- Bank Simpanan Nasional- Bank Rakyat

- HSBC- Citibank- Standard Chartered- United Overseas Bank- OCBC Bank

Bank facilities cont…• Bank Accounts

ACCOUNTS

Saving AccountCurrent Account

- This account is used for saving purposes and common for anybody

- The flow of money in and out is unexpected .- No overdraft services

- Used for regular bank in and withdrawal of money and chequeservices

- This type of account allowed overdraft (more money taken out than has been put in ) facilities.

- Normally , bank will ask for advance money in agreement to give ‘overdraft’ services .

Deposit Account

- This account is normally money paid into the account will remain there for some time and that withdrawals will be ‘infrequent’ .

- Interest will be paid by the bank on the account balance , that is much more higher than saving and current account .

Normally , business will open

this type of account , mainly for cheque and

overdraft services

Bank facilities cont…

• Method of payments

- Cheque payment

- Credit Transfer

- Standing Order

- Direct Debit

Cash book and bank statement balances

• Cash Book– In a business, Cash Book will record all the funds in and out of

a business. – Sometimes, there is situation where transaction happened in

Bank Statement does not same with business’s Cash Book.

Cash Book (Bank Columns only)20X8 RM 20X8 RMDec 1 Balance b/d 3000 Dec …

31 Balance c/d 15003000 3000

Bank StatementDate Details Debit (RM) Credit (RM) Balance (RM)20X8Dec 1 Balance b/d … … 3000

31 Balance c/d … … 1500

This balances

are not same!

1000

Cash book and bank statement balances cont…

• Bank Statement – At the end of every month, bank will send a copy of Current Account

transactions to its customers. This copy is called as Bank Statement. – This immediate bank statement could help owner of a business to

update their Cash Book.

Business(Bank customer)

Money deposited into bank

- Cash Book (debit)- Bank Current Account (credit)

Cash Book (debit balance)

Bank is debtor for this business

Payment made by cheque

- Cash Book (credit)- Bank Current Account (debit)

Cash Book (credit balance)

Bank is creditor for this business

Cash book and bank statement balances cont…

• What may cause the differences in Cash Book and Bank Statement?

Differences

Cash Book items are not listed in Bank Statement

Bank Statement items are not listed in Cash Book

- Cheque paid to creditor still not represented in bank

-Cheque received from debtor still not represented in bank

-Bank credit (income) some amount in business account

-Bank debit (expenses) some amount in business account

- Dishonoured cheque

Importance of Bank Reconciliation Statement

• Bank Reconciliation is prepared by owner if he/she found out that the balances in Cash Book and Bank Statement are different.

• This bank statement can control;– Cash losses in business; stolen or misused business money– Business activities such as the bill payments and can avoid late or advance payments– Excess cash can be invested to earn extra revenue rather than having it on hand

FORMAT OF BANK RECONCILIATION STATEMENT

Balance per Cash Books (Dr) xAdd: Unpresented cheques x

Interest earned xXX

Less: Bank Lodgements not on statement (x)Less: Bank Service Charges (x)

 Add/Less Errors in company’s cash account (x)Balance per Bank Statement (Credit) XX

RM

Bank Reconciliation Statement as at …….

(i) Statement that starts from debit balance of cash book

FORMAT OF BANK RECONCILIATION STATEMENT

Balance as per Bank Statement (Cr) xAdd: Bank Lodgements not on statement x

Bank Service Charges xXX

Less: Unpresented cheques (x)Balance per Cash Book (Debit) XX

Bank Reconciliation Statement as at …….

(ii) Statement that starts from credit balance of bank statement (ii) Statement that starts from credit balance of bank statement

RM

Preparation of Reconciliation Statement

STEP 1: Compare the items from debit side of Cash Book and items in credit side of Bank Statement

STEP 2: Compare the items from credit side of Cash Book and items in debit side of Bank Statement

STEP 3: Identify for any mistakes in Cash Book or Bank Statement

STEP 4: Prepare Bank Reconciliation Statement

-Items in Cash Book that is not in Bank Statement-Items in Bank Statement that is not in Cash Book

-Any error in Bank Statement and Cash Book

Classroom activity1. What might cause the two balances to be different? Spend two minutes making a list.

2. Will the bank statement show “Dr’ or ‘Cr’ if an account is overdrawn?

3. Why is that important to perform a Bank Reconciliation when a bank statement is received?

4. Why cheques may be dishonoured and what the effect is upon the bank balances

5. State the differences between two method of payments; Credit Transfer and Standing Instruction

Cash Book 20X8 RM 20X8 RM

1-Dec Balance b/d 160 8-Dec V O'Connor 11512-Dec D.Tyrall 80 21-Dec 3523-Dec P.McCarthy 130 31-Dec 2531-Dec S.Aisbitt 72 31-Dec Balance c/d 267

442 44220X91-Jan Balance b/d 267

Step 2Compare CR item on CB with DR item on BS and if there any unmatched item

circle it out

Step 1Compare DR item on CB with CR item on BS and if there any unmatched item

circle it out

Step 3Prepare bank recon based on:

-Items in Cash Book that is not in Bank Statement

Balance as per cash book

Bank Statement20X8 Withdrawals Deposits Balance b/d

1-Dec Balance b/d 16011-Dec 24621 115 4514-Dec Deposit 80 12523-Dec 24622 35 9029-Dec Deposit 130 22030-Dec Bank Giro credit 24 24431-Dec Bank Charges 40 204

Notes

Step 2Compare DR item on BS with CR item on CB and if there any unmatched item

circle it out

Step 1Compare CR item on BS

with DR item on CB and if

there any unmatched item circle it

out

Step 3Prepare bank recon based on:

Items in Bank Statement that is not in Cash Book

Notesa) A bank giro credit of RM 24 made on Dec 30 by A.Parkinsonb) Bank Charges of RM 40

BANK RECONCILIATIONSolution 1

Balance as per cash book

+ all credit item on both CB and BS

- all debit item on both CB and BS

Balance as per bank statement

Solution 2

Balance as per bank statement

- all credit item on both CB and BS

+ all debit item on both CB and BS

Balance as per cash book

Solution