Bank Reconciliation Statements

 BANK RECONCILIATION STATEMENTS

The cashbook for cash at bank records all the transactions taking place at the bank i.e. the movements of the account held with the bank.  The bank will send information relating to this account using a bank statement for the firm to compare.

Ideally, the records as per the bank and the cashbook should be the same and therefore the balance carried down in the cashbook should be the same as the balance carried down by the bank in the bank statement.

In practice however, this may not be the case and the two (balance as per the bank - bank statement, and balance as per the business - cashbook) are different.  A bank reconciliation statement explains the difference between the balance at the bank as per the cashbook and balance at bank as per the bank statement.

Causes of the differences:

The difference between the cashbook and the bank statement balance results from two factors:

i)                     Timing differences in recording of transactions

ii)                   Omissions – unrecorded items

iii)                  Errors made by either the business or by the bank in recording transactions.

Timing differences

These are the differences caused by time lag in the receipt of information or recording of a transaction between the bank and the business. Eg.

ü  Unpresented/ outstanding cheques

ü  Uncreditedcheques/deposits(unclearedlodgements)

Omissions

These are items which arise in the bank statements before they are recorded in the cash book. Such ‘unrecorded items’ may include:

ü  Direct credits

ü  Direct debits/ standing orders

ü  Bank charges

ü  Bank interest received

ü  Unpaid cheques (due to stoppage by the drawer or returned as disnonoured -bounced)

Difference caused by errors

The difference between the cashbook and bank balances may be caused by an error on the part of the bank or in the cashbook entries. Frequent bank reconciliation is advisable so as to identify and rectify errors as soon as possible. It is a good business practice to prepare a bank reconciliation statement each time a bank statement is received. This will ensure that any queries either with the bank statement or in the firm’s cashbook can be resolved.

The Purposes of a bank reconciliation statement.

1. To update the cashbook with some of the items appearing in the bank statement e.g. bank charges, interest charges and dishonouredcheques and make adjustments for any errors reflected in the cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.

Steps in preparing a bank reconciliation statement.

1. To update the cashbook with the items appearing in the bank statement and not appearing in the cashbook except for errors in the bank statement. Items on the bank statement not in the cashbook include the bank charges, direct credits and payment standing orders. Adjustments should also be made for errors in the cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank statement to determine the uncredited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank statement to determine the unpresented cheques.
4. Prepare the bank reconciliation statement which will show:
         a)    Unpresented cheques

b)      Uncredited deposits

c)       Errors on the bank statement

d)      The updated cashbook balance.

Items Appearing In The Cashbook And Not Reflected In The Bank Statement.

a)       UnpresentedCheques:Cheques issued by the firm for payment to the creditors or to other suppliers but have not been presented to the firm’s bank for payment.For instance, the business-paying cashier may send cheques out to suppliers, some of whom may pay-in the cheque at the bank immediately while others may keep the cheque for several days before paying it in. when this happens, the cashier will have recorded all the payments in the cashbook. However, the bank records will only show the cheques that have actually been paid in by the suppliers and deducted from the business bank account. While the unpresentedcheques appear as a payment in the cashbook, they would not appear in the bank statement.

b)      Uncredited deposits/cheques: These are cheques received from customers and other sources for which the firm has banked but the bank has not yet availed the funds by crediting the firm’s account. For instance the firm’s records a receipt in the cashbook from the bank paying in slip. However, the bank may not record the receipt for a day or so, particularly if it is paid in late in the day, or if it is paid in at a bank branch other than the one at which the account is maintained.

c)      Errors made in the cashbook

These include:

• Payments over/understated
• Deposits over/understated
• Deposits and payments misposted
• Overcasting and undercasting the Bal c/d in the cashbook.

These errors will be corrected in the cash book. (Adjusted cash book)

Items appearing in the bank statement and not reflected in the cashbook:

i)     Bank charges: These are fees charged by the bank for maintaining the account and for executing transactions. They include ledger fees, commissions, charges on cheques and other levies. The business will not know the charges until they receive the bank statement. Such charges will appear in the bank statement but not in the cashbook.

ii)   Interest charges on overdrafts.

iii) Direct Debits/Standing orders: standing orders are instructions to the bank to execute payments on behalf of the business. Normally, periodic payments like insurance are best executed by way of standing order. The business might not know about the execution of the payment until the receipt of bank statement. The standing order will appear in the bank statement but not in the cashbook.

iv) Dishonored cheques-A cheque would be dishonored because:

·         Stale cheques

·         Post – dated cheques

·         Insufficient funds

·         Differences in amounts in words and figures.

v)   Direct credits: This occurs when a bank receives a direct payment for the business. In this instance, the bank will have recorded the receipt in the business’s account at the bank but the business will be unaware of the payment and will therefore not have recorded the receipt in the cashbook. E.g payments received on the business account from debtors (customers) when the payment has not been advised to the business.

vi) Interest Income/Dividend incomes- These are standing orders for incoming payments received by the bank on the business account.

vii)Errors of The Bank Statement (Made By The Bank).

Such errors include:Overstating/understating.

• Deposits
• Withdrawals

The bank statement will need to be adjusted for these errors made by the bank in the bank reconciliation statement.

The format for bank reconciliation statement is as follows:

(Format 1)

Name:

Bank Reconciliation Statement as at 31/12

                                                                                    £                                  £

Balance at bank as per cashbook (updated)                                                          x

Add: Unpresentedcheques                                             x

         Errors on Bank Statement (see note 1)                   x                                  x

                                                                                                                        x

Less: Uncredited deposits/lodgements                           x

         Errors on Bank Statement (see note 2)                   x                                  (x)

Balance at bank as per Bank statement                                                                x

           

Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated deposit or an understated payment by the bank.

Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an understated deposit or an overstated payment by the bank, or making an unknown payment.

Format 2

Name:

Bank Reconciliation Statement as at 31/12

                                                                                    £                                  £

Balance at bank as per bank statement                                                                x

Add: Uncredited deposits                                              x

         Add errors on bank statement (note 2)                  x                                  x

                                                                                                                        x

Less: Unpresentedcheques                                             x

         Errors on bank statement (note 1)                         x                                  (x)

Balance at bank as per cashbook (updated)                                                          x

                                                                                                                        ===

Illustration

Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the balance on the bank statement, from the following as on 31 March 2003:

                                                                                                                                    £

Cash at bank as per bank column of the cashbook (Dr)                                              38,960

Bankings made but not yet entered on bank statement                                                   6,060

Bank charges on bank statement but not yet in cashbook                                                 280

Unpresentedcheques C. Clarke                                                                                     1170 

 Standing order to ABC Ltd entered on bank statement, but not in cash book                  550

Credit transfer from A. Wood entered on bank statement, but not yet in cashbook              1,890

Illustration 2

The following are extracts from the cashbook and the bank statement of J Richards.  You are required to:

a)       Write the cashbook up to date, and state the new balance as on 31 December 2002, and

b)      Draw up a bank reconciliation statement as on 31 December 2002.

Dr.Cashbook                                        Cr.

2002                                                             £    2002                                          £                  

Dec 1               Balance b/d                  1,740     Dec 8 A Dailey                          349

Dec 7               J Map                                88     Dec 15            R Mason                           33

Dec 22              J Cream                                         73     Dec 28            G Small                                       115

Dec 31              K Wood                          249     Dec 31            Balance c/d                   1,831

Dec 31              M Barrett                         178                                                   

 2,328   2,328

Bank Statement

2002                                                                 Dr                    Cr                    Balance

                                                                        £                      £                      £

Dec      1          Balance b/d                                                                              1,740

Dec      7          Cheque                                                             88                     1,828

Dec      11         A Dailey                                   349                                            1,479

Dec      20         R Mason                                   33                                             1,446

Dec      22         Cheque                                                             73                     1,519

Dec      31         Credit transfer: J Walters                                                54                     1,573

Dec      31         Bank charges                               22                                           1,551

                                                                                                                       

Illustration 3

(a)  Explain the term “bank reconciliation” and state the reasons for its preparation.

(b)  Ssemakula, a sole trader received his bank statement for the month of June 2001.  At that       

date the bank balance was Sh. 706,500 whereas his cash book balance was Sh.2,366,500. 

      His accountant investigated the matter and discovered the following discrepancies:

1.       Bank charges of Sh.3, 000 had not been entered in the cashbook.

2.       Cheques drawn by Ssemakula totaling Sh.22, 500 had not yet been presented to the bank.

3.       He had not entered receipts of Sh.26, 500 in his cashbook.

4.       The bank had not credited MrSsemakula with receipts of Sh.98, 500 paid into the bank on 30 June 2001.

5.       Standing order payments amounting to Sh.62, 000 had not been entered into the cashbook.

6.       In the cashbook Ssemakula had entered a payment of Sh.74, 900 as Sh.79, 400.

7.       A cheque for Sh.15, 000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cashbook.

8.       Ssemakula had brought forward the opening cash balance of Sh.329, 250 as a debit balance instead of a credit balance.

9.       An old cheque payment amounting to Sh.44, 000 had been written back in the cashbook but the bank had already honored it.

10.    Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account.  Unfortunately, the bank had credited some deposits amounting to Sh.832, 500 to another customer’s account.  However acting on information from his customers  Ssemakula had actually entered the expected receipts from the debtors in is cashbook.

Required:

1. A statement showing Ssemakula’s adjusted cashbook balance as at 30 June 2001.  (9 marks)
2. A bank reconciliation statement as at 30 June 2001.                                              (5marks)

(Total: 20 marks)