Bank Reconciliation Statement

Topic seven lessonsImportance of control accounts in

identification and correction of errorsControl accounts can help identify errors that

could otherwise not be identified by the trial balance

Control accounts helps improve internal control systems

Bank reconciliations are part of internal controls.

They help to check control over cash balancesWe shall appreciate the importance of

performing regular bank reconciliations

After studying this topic, you should be in a position to:

Describe a bank reconciliation statement

Explain why we prepare bank reconciliations

Prepare bank reconciliations Pass correction entries to clear

reconciling differences

To ascertain accuracy of the cash book To identify errors made by the bank in

good time To identify dishonored cheques and

adjust customers accounts promptly To identify omitted expenses. To review stale cheques where payees

have not banked for more than six months

Prevent errors and frauds

Useful tips Bank reconciliations should be

performed regularly Reconciling differences should be

investigated Errors in the cash book should be

corrected promptly Errors by the bank should be reported

promptly Bank reconciliations should be reviewed

by a responsible company official

Common reconciling differencesOutstanding cheques:-

Are cheques payments that are yet to be effected by the bank. Payees might have not banked the cheques. No adjustment is required in the cash book unless for cheques that have become stale

Deposits in transit:Relates to deposits made mainly towards year end. They are most likely to be recorded by the bank in the subsequent period. If proof of subsequent recording by the bank can be done, no adjustment is required in the cash book

Errors in the cash book :Recording errors might be made by accountants for payments and receipts resulting to either over or under banking. Entries should be passed to make corrections for these errors.

Errors in the bank:-Bank officials could also make errors. When such are identified, a quick follow up should be done to ensure that they are corrected by the bank. No adjustments are required in the cash book.

Bank charges:-

Banks will charge for the services offered. Accountants might fail to identify these charges except after performing bank reconciliations. Such expenses should be posted in the cash book.

Direct depositsSome customers could be making direct payments into the company’s bank accounts. At year some of these receipts will not have been posted. The cash book should be adjusted for direct deposits.

Direct transfersBanks offer collection and payment system. Direct transfers arise where the company has contracted the bank to be making some regular payments directly to service providers such as for insurance. In such a case, the accountant might fail to post such payments and the cash book should be adjusted accordingly.

To learn how to prepare bank reconciliations, we shall make use of an illustration.

IllustrationRakesh superstores’ senior accountant noted that as at 31 July 2011, the cash book ledger did not tally with the bank statement. Whereas the cash book ledger had a balance of $10,483.25, the bank statement balance was $12,486.80. On further enquiries the following was noted.

The bank made an error in recording a deposit made by Rakesh. Instead of recording the amount in the cheque of $6,600, they recorded $6,260.

As at 31 July 2011, the following cheques issued to various payees had not been paid by the bank.Cheque no Amount ($)367 2,517.75 396 3,357.00 381 1,678.50 373 1,678.50 386 4,196.25 394 3,357.00

Total 16,785.00

Some customers made direct deposits into the bank account which were yet to be recorded by Rakesh. The listing of these deposits are as follows;Ref Amount ($)Abdul (2,000.00)Yusuf (1,500.00)

The cashier had made an error on 18 July 2011. Instead of posting a cheque payment (Cheque no. 365) to Duncan Stores of $6,550, he posted the payment as $6,200.

Bank charges amounting to $180 had not been posted as at the close of the month.

Direct transfers by the bank for monthly insurance premium of $400 had not been posted. However, the insurance expense for the month had been properly posted.

The bank did not credit a deposit of $871.45 made by Rakesh on 12 July 2011. The bank manager admitted that this was an oversight on the part of the bank and confirmed that the error had been corrected.

The bank had not recorded the following deposits made by Rakesh on 31 July 2011.

Cheque No. Amount ($)

1214 7,600.00

138 8,540.00

 Required:-

Reconcile the bank statement with the cash book

Pass entries to correct the cash book

See next slide for suggested solutions

Rakesh SuperstoresStatement of correction of the bank

statement

For the month ended 31 July 2011

Amount($)

Bal indicated 12,486.80

Short banking 340.00

Deposits in transit 871.45 Correct bank statement balance 13,698.25

Rakesh SuperstoresBank Reconciliation Statement

For the month ended 31 July 2011Amount ($)

Bal as per bank statement 12,486.80 Corrected bank statement bal 13,698.25 Less:1. Outstanding cheques (16,785.00)2. Direct deposits (3,500.00)Add:-

1. Deposits in transit 16,140.00

2. Errors in the cash book 350.003. Bank charges 180

4. Direct transfers 400 Cash book balance 10,483.25

Rakesh SuperstoresStatement of corrected cash book

balanceFor the month ended 31 July 2011

Amount ($)Balance as per the records 10,483.25 Direct deposits 3,500.00

Errors in the cash book

(350.00)Bank charges (180.00)Direct transfers (400.00)

Corrected cash book balance

13,053.25

Rakesh SuperstoresStatement of Reconciled bank balance

For the month ended 31 July 2011Amount ($)

Bank statement balance 13,698.25 Deposits in transit 16,140.00

Outstanding cheques

(16,785.00)

Reconciled bank balance 13,053.25

Similar principles apply Important notes are

i. Bank overdraft overstated by debits in cash book not recorded by the bank

ii. Bank overdraft understated by credits in cashbook not in the bank

iii. Debits in the bank not in the cash book will cause cash book OD to be understated

iv. Credits in the bank not in the cash book will cause cash book OD to be overstated

Reconciliation will be performed as illustrated above subject to the above four tips

Necessary to restate the cash book As noted earlier, errors should be

investigated and adjusted in the accounts promptly

Backlog of errors in the bank reconciliation dilutes controls over cash and bank

We shall use our earlier illustration to demonstrate how to pass correction entries.

Errors identified in the cash book based on the reconciliations were; Omission of direct deposits

amounting to $3,500 Misposting of payments by $350

($6,550 - $6,200) Omission of bank charges $180 Omission of bank transfers for

insurance premiums $400

See the next slide for correction entries

Rakesh SuperstoresCash book ledger correction entriesFor the month of July 2011

Description Debit ($)Credit ($)

1 Cash 3,500 Accounts receivable

Abdul 2,000

Yusuf 1,500

Being un-posted receipts from credit customers2 Accounts payable- Duncan Stores 350

Cash 350 Being understatement in posting of cheque payment (Cheque no. 365)

3 Bank charges 180

Cash 180 Being posting of bank charges for the month of July 2011

4 Accounts payable-Insurance 400

Cash 400 Being insurance payments

In this topic we have learnt; the importance of preparing bank reconciliations How to prepare bank reconciliations

Have identified major sources of reconciling differences such as; Outstanding cheques Deposits in transit Errors in the cash book Errors in the bank Bank charges omitted in the cash book Direct deposits unrecognized in the cash book Direct transfers in the bank not recognized in the cash

book We have identified correction entries necessary to

update the cash book with some reconciling items

Questions