Professional Documents
Culture Documents
Learning Objectives:
1. That our banker might have allowed interest which have not yet been entered in our
cash book.
2. That our banker might have debited our account for any such item as interest on
overdraft, commission for collecting cheque, incidental charges etc., which we have
not entered in the cash book.
3. That some of the cheque which we drew and for which we credited our bank account
prior to the date of closing, were not presented at the bank and therefore, not
debited in the bank statement.
4. That some cheques or drafts which we have paid into bank for collection and for
which we debited our bank account, were not realised within the due date of closing
and therefore, not credited by the bank.
5. The banker might have credited our account with amount of a bill of exchange or any
other direct payment into bank and the same may not have been entered in the cash
book.
6. That cheques dishonoured might have been debited in the bank statement but have
not been given effect to in our books.
1. Check the cash book receipts and payments against the bank statement.
2. Items not ticked on either side of the cash book will represent those which have not
yet passed through the bank statement.
3. Make a list of these items.
4. Items not ticked on either side of the bank statement will represent those which
have not yet been passed through the cash book.
5. Make a list of these items.
6. Adjust the cash book by recording therein those items which do not appear in it but
which are found in the bank statement, thus computing the correct balance of the
cash book.
7. Prepare the bank reconciliation statement reconciling the bank statement balance
with the correct cash book balance in either of the following two ways:
(a) If the bank statement balance is a debit balance (an overdraft), deduct from it all
cheques, drafts, etc., paid into bank but not collected and credited by the bank and
add to it all cheques drawn on the bank but not yet presented for payment. The new
balance will then be agree with the balance of the cash book.
(b) If the bank statement balance is a credit balance (in favor of the depositor), add to it
all cheques, drafts, etc., paid into the bank but not collected and credited by the bank
and deduct from it all cheques drawn on the bank but not yet presented for payment.
The new balance will agree with the balance of the cash book.
Alternatively:
On checking the bank statement with the cash book it was found that a cheque for $116
paid in on the 31st December was not credited until the 1st January, 1992 and the following
cheques drawn prior to 31 December were not presented at the bank for payment until the
5th January 1992. Rashid & Sons $29, Bashir & Co. $801, MA Jalil $6, Khalid Bros., $132.
Solution:
First Method:
Balance as per cash book - Dr. 1,401
Less cheques paid in but not collected 116
1,285
Add cheques drawn but not presented:
Rashid & Sons 29
Bashir & Co. 801
MA Jalil 6
Khalid Bros. 132 968
Solution:
Bank Reconciliation Statement as on 31st March, 1991
11,250
Less cheques issued but not presented 1,200
10,050
Add bank charges made by the bank 35
10,085
Less omission in cash book ($800 + $130) 930
Note:
1. Charges made by the bank $35 have not been recorded in the cash book, therefore, the balance in cash book is
more. Add to bank statement balance also.
2. Dividend and amount from customers received by the bank have not been recorded in the cash book. Therefore,
in the cash book there is no entry of $930 (800 + 130). Deduct from the bank statement balance to adjust it
according to cash book balance.
Bank Reconciliation
Bank reconciliation is the process of matching and comparing figures from accounting
records against those presented on a bank statement. Less any items which have no
relation to the bank statement, the balance of the accounting ledger should reconcile
(match) to the balance of the bank statement.
Since there are timing differences between when data is entered in the banks systems and
when data is entered in the individual's system, there is sometimes a normal discrepancy
between account balances. The goal of reconciliation is to determine if the discrepancy is
due to error rather than timing.
When all of the receipts for a period have been written up in the cash receipts book and
all of the cheque payments, standing orders and direct debits have been entered into
the cash payments book, it is necessary to carry out any further checks possible on the
cashbook. The most obvious check is to compare the entries in the cash receipts and cash
payments book for the period, to the entries on the bank statement, although some care
does need to be taken here.
One of the most obvious differences between the cashbook and the bank statement is that
the use of the terms debit and credit appear to be totally opposed to each other.
If cash is paid into the bank by a business then for the business this is a receipt and is
entered in the cash receipts book as a debit entry. However, in the bank statement this will
be described as a credit and the balance will be a credit balance. This is due to the fact that
if a business has money in the bank, the bank effectively owes the money back to the
business and therefore the business is a creditor to the bank.
Similarly, if the business writes a cheque out of the business bank account this will be
entered in the cash payments book as a credit entry. From the bank's perspective however,
this is known as a debit entry and any overdrawn balance is a debit balance.
How To Do A Bank Reconciliation
Summarised, the procedure for performing a bank reconciliation, in four simple steps:
1. Compare the cash receipts book to the receipts shown on the bank
statement (the credits on the bank statement) - for each receipt that agrees, tick
the item in both the cashbook and the bank statement.
2. Compare the cash payments book to the payments shown on the bank
statement (the debits on the bank statement) - for each payment that agrees, tick
the item in both the cashbook and the bank statement.
3. Any un-ticked items on the bank statement (other than rare errors made by the
bank) will be items that should have been entered into the cash books, but have
been omitted for some reason - these should be entered into the cashbook and then
the amended balance on the cashbook can be found. To find the correct cashbook
balance a ledger account is used for the bank with the original cashbook balance
shown as the brought forward balance and any additional payments shown as credits
and receipts as debits. This is illustrated in the example.
4. Finally, any un-ticked items in the cashbook will be the timing differences -
unpresented cheques and outstanding lodgements - these will be used to reconcile
the bank statement closing balance to the corrected cash book closing
balance.
In our example you may have noted that the opening balance on the cashbook agreed with
that of the bank statement - there were no unpresented cheques or outstanding lodgements
at the end of the previous period.
This will not always be the case. If there were timing differences at the end of the previous
period, then a bank reconciliation statement would have to be prepared. When
comparing this period's bank statement and cashbook you will need to have the previous
period's bank reconciliation statement in order to be able to tick last period's timing
differences when they appear on the bank statement this period.
Conclusion
When Anne is preparing her bank reconciliation at the end of April, she is likely to find that
the unpresented cheques at the end of March, cheque numbers 103572 to 103574 do
appear on the bank statement in April. When they are found on the bank statement in
April, they should then be ticked on the bank statement and on the opening bank
reconciliation statement. The same will happen with the two outstanding lodgements at the
end of March, when they appear on the bank statement in April.