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FINANCIAL ACCOUNTING
Posted by Chester Morton / Monday 2 May 2016 / No comments
Bank reconciliation
Banks normally prepare bank
statements monthly to their clients. A bank statement is a statement prepared by
a bank to its client or customer showing transactions that have occurred during
a particular month between them.
Bank reconciliation statement is
a statement that is prepared to explain any difference between a bank statement
balance and a cash book (bank column) balance. It is normally prepared when the
balance in the bank statement is different from that in the cash book.
The reasons why the cash book
balance will be different from the bank statement balance can be grouped into
four categories as follows:
1. Items
on bank statement only
2. Errors
in the cash book
3. Errors
in the bank statement
4. Items
in the cash book only (also known as timing difference)
Category 1 and 2 are used to
update the cash book while 3 and 4 are used to reconcile the cash book balance
with the bank statement balance.
1.
Errors:
These may be made by the bank and
included in the bank statement or in the cash book. Errors in the cash book
must be corrected (in the cash book) so as to ascertain the correct cash book
balance before preparing the financial statement.
Errors made by the bank are dealt
within the reconciliation statement (but not in the cash book).
2.
Items
appearing on the Bank Statement only:
These are as follows:
i.
Interest payable or receivable
ii.
Standing order: This occurs where a customer orders a bank
to pay a fixed sum of money at regular intervals on his behalf.
iii.
Direct debit: This is where a bank pays an amount on
behalf of its clients and debits the bank statement with it.
iv.
Bank charges: This refers to amounts a bank charges its
client for the services it renders. Example is the commission on turnover.
v.
Credit transfer (or Giro transfer): This is an amount
received on behalf of its client and credited to the bank statement but not
debited to the cash book until the bank statement is received.
vi.
Dishonoured cheques:
These are cheques received from customers, recorded in the cash book and paid
into the bank account but are later dishonoured.
Some of the reasons why a cheque may be dishonoured
are a wrong signature, insufficient fund, inconsistency between the amount in
words and in figures on the cheque and so on.
3.
Items that
appear in the Cash Book Only:
These are transactions recorded
in the cash book only but not by the bank. These are:
i.
Unpresented cheques: These are cheques issued to
creditors and entered in the cash book but do not appear on the bank statement
because they have not been submitted to the bank for payment.
ii.
Uncredited cheques (or unaccredited lodgement): These are cheques from
customers, debited to the cash book and paid into the bank account but do not
appear on the bank statement because the bank has not credited the bank
statement.
Before the bank reconciliation
statement is prepared the cash book must be updated or adjusted with items that
appear only in the bank statement. Any error made in the cash book must also be
corrected so as to obtain the correct cash book balance.
The adjusted (or revised or
updated) cash book may appear as follows:
Revised Cash Book
$
|
$
|
||
Balance b/f
|
***
|
Balance b/f (if
any)
|
***
|
Credit transfer
|
***
|
Standing order
|
***
|
Dividend received
|
***
|
Direct debit
|
***
|
Correction of
error
|
***
|
Dishonoured
cheques
|
***
|
Bank charges
|
***
|
||
Bank interest
|
***
|
||
Correction error
|
***
|
||
Balance c/d
|
***
|
||
***
|
***
|
||
Balance b/d
|
***
|
After the cash book has been
adjusted, the bank reconciliation statement can be prepared with the following:
i.
Items appearing only in the cash book.
ii.
Errors by the bank.
The bank reconciliation statement
may appear as follows:
Bank Reconciliation Statement as at January
31, 20X8
$
|
$
|
|
Balance as per revised cash book
|
***
|
|
Add: Unpresented
cheques
|
***
|
|
Amount credited in error by bank
|
***
|
***
|
***
|
||
Less: Uncredited
cheques
|
***
|
|
Amount debited in error by bank
|
***
|
***
|
Balance as per Bank Statement
|
***
|
Exercise 1
a.
Define the following:
i.
Bank statement
ii.
Bank reconciliation statement
iii.
Standing order
b.
The cash book balance and the bank statement balance of
TD Ltd failed to agree. You have been provided with the cash book which was
prepared prior to the receipt of the bank statement as follows:
Cash Book
$
|
$
|
||
Balance b/f
|
5,000
|
Rent
|
2,000
|
Sales
|
4,000
|
F. Foray
|
11,200
|
T. Levin
|
18,000
|
Salaries
|
500
|
Balance c/d
|
13,300
|
||
27,000
|
27,000
|
||
Balance b/d
|
13,300
|
The bank statement received for
the month showed the following:
$
|
|
Bank charges
|
20
|
Interest income
|
200
|
Standing order
|
400
|
Credit transfer
|
1,200
|
Direct debit
|
150
|
Dishonoured
cheques
|
800
|
Amount debited in
error by the bank during the month
|
120
|
Amount credited in
error by the bank during the month
|
240
|
When the bank statement was
compared to the cash book it was realized that cheques issued amounting to
$3,400 had not been recorded by the bank and cheques amounting to $1,500 lodged
with the bank had not been shown on the statement.
You are required to
a. Show
the correct cash position of the business.
b. Prepare
a bank reconciliation statement to determine the balance on the bank statement
received.
Exercise 2
On 6th Jan, 2007
Master Denis received his monthly bank statement for the month ended 31st
Dec, 2006. The bank statement contained the following details.
Master Denis
Statement of Account with Apex Bank Limited
Debit
|
Credit
|
Balance
|
|||
2006
|
$
|
$
|
$
|
||
Dec
|
1
|
Balance b/f
|
2471.20
|
||
“
|
5
|
Cash
|
314.00
|
2785.20
|
|
“
|
12
|
Cheque
|
375.00
|
3160.20
|
|
“
|
14
|
Cheque 41002
|
152.50
|
3007.70
|
|
“
|
14
|
Sundries
|
62.80
|
3070.50
|
|
“
|
15
|
Cheque 41003
|
300.00
|
2770.50
|
|
“
|
19
|
Cash
|
175.00
|
2945.50
|
|
“
|
26
|
Cash
|
425.00
|
3370.50
|
|
“
|
29
|
Cheque 41005
|
240.00
|
3130.50
|
|
“
|
30
|
Charges
|
22.75
|
3107.75
|
|
“
|
31
|
Transfer
|
64.00
|
3171.75
|
For the corresponding period
Master Denis books contained the following bank account.
Bank Account
2006
|
$
|
2006
|
$
|
||||
Dec
|
1
|
Balance b/f
|
2,471.20
|
Dec
|
2
|
A. Alou 41001
|
358.25
|
“
|
5
|
Sales
|
314.00
|
“
|
13
|
Jang Ltd 41002
|
152.50
|
“
|
12
|
Sales
|
375.00
|
“
|
15
|
Cash 41003
|
300.00
|
“
|
14
|
G. Tijuana
|
62.80
|
“
|
29
|
O K 410004
|
600.00
|
“
|
19
|
Sales
|
175.00
|
“
|
31
|
Obit 41005
|
240.00
|
“
|
26
|
Sales
|
425.00
|
“
|
31
|
Balance c/d
|
2,246.95
|
“
|
31
|
Ola
|
74.70
|
||||
3,897.70
2,246.95
|
3,897.70
|
||||||
Jan
|
1
|
Balance b/d
|
You are required to prepare
i.
The revised cash book.
ii.
The bank reconciliation statement as at 31st
Dec, 2006.
Exercise 3
The Cash Book and Bank Statement
of Ayes Enterprise are given below
CASH BOOK
April 2008:
|
$
|
April 2008
|
$
|
||
10
|
A. Sash
|
440,000
|
1
|
Balance b/f
|
2,598,500
|
16
|
M. Nash
|
122,000
|
6
|
T. Bullock
|
61,000
|
21
|
A. Alexander
|
166,500
|
9
|
S. Baba
|
499,000
|
22
|
B. Sheriff
|
1,008,000
|
14
|
K. Kati
|
949,000
|
30
|
S. Unclear
|
80,000
|
30
|
B. Annette
|
104,000
|
30
|
Balance c/d
|
2,640,000
|
30
|
S. Jaw
|
245,000
|
4,456,500
|
4,456,500
|
BANK STATEMENT
April 2008
|
DR ($)
|
CR ($)
|
Balance ($)
|
||
1
|
Balance b/f
|
2,598,500
|
O/D
|
||
8
|
T. Bullock
|
61,000
|
2,659,500
|
||
16
|
Cheque
|
122,000
|
2,537,500
|
||
20
|
B. Annette
|
104,000
|
2,644,500
|
||
21
|
Cheque
|
166,500
|
2, 475,000
|
||
31
|
T. Mumbull: Credit
Transfer
|
28,500
|
2,446,500
|
||
31
|
B. E. D: Standing
Order
|
24,500
|
2,471,000
|
||
31
|
Bank Charges
|
14,000
|
2,485,000
|
||
31
|
Dividend:
Investment
|
2005,000
|
480,000
|
You are required to:
a. write
up the adjusted cash book;
b. prepare
a bank reconciliation statement as at 30 April, 2008.
Exercise 4
Slender Ltd. operates a current
account with Apex Bank Ltd. All receipts and payments are passed through this
account. The accounts officer prepared the following bank reconciliation
statement at December 31, 2008:
$000
|
|
Balance per bank
statement
|
21,000
|
Add uncredited
cheques
|
4,620
|
25,620
|
|
Less unpresented
cheques
|
6,000
|
Balance per cash
book
|
19,620
|
The bank transactions for January
2009 are:
Per Bank
|
Per Cashbook
|
|
$000
|
$000
|
|
Balance, January
31, 2009
|
25,650
|
27,750
|
January, cheque
deposits
|
15,000
|
17,730
|
January,
withdrawals
|
12,300
|
9,600
|
January, credit
transfers
|
3,700
|
|
January, standing
order (insurance)
|
1,000
|
|
January, reversal
of cheque credited in error
|
705
|
|
January,
commission on turnover
|
45
|
You are required prepare:
i.
The adjusted cash book for January 2009;
ii. The
bank reconciliation statement as at January 31, 2009.
Exercise 5
You have been asked to complete
the bank reconciliation at 30 November 2008 for Jeremy Stiles. The debit balance
on the bank account in his general ledger is $2,717. His bank statement shows
that he has $44 at the bank.
You have noted the following:
i. Due
to an addition error, Jeremy overstated the total of cash banked by $900.
ii. Jeremy recorded the value of a cheque paid to
a supplier as $540. The cheque was debited on the bank statement at the correct
value of $450.
iii.
Jeremy did not record interest earned of $120, or bank
charges of $265. Both of these items are shown on the bank statement for
November.
iv.
During November, a lodgment of $4,000 to Jeremy’s
personal account was credited to his business account by the bank.
v. A
customer’s cheque for
$464 was returned as the customer did not have sufficient funds for payment. Jeremy
has not made any entries in his books for the return of the cheque.
vi.
A lodgement
for $7,785 was not credited by the bank until 1 December. Jeremy recorded this lodgement in November.
vii.
Cheques issued, with a total value of $2,531, have not
been debited by the bank. This includes a cheque for $427 which was cancelled.
Jeremy has not made any entries in his books to record the cancellation of the
cheque.
Required:
a. Show the bank account in Jeremy’s general
ledger, including any adjusting entries which are required by the information
in (i) to (vii) above;
Note: You
MUST present your answer in a format which clearly indicates whether each entry
is a debit entry or a credit entry. (7 marks)
b.
Prepare a
reconciliation of the balance on the bank statement to the corrected balance on
the bank account in Jeremy’s general ledger. (5 marks)
Jeremy took out a bank loan on 31 October 2008 for
$20,000. This is due for repayment in 16 equal instalments at three-monthly
intervals. The first repayment is due on 31 January 2009.
Required:
State how the
balance on Jeremy’s bank account and the bank loan should be reported on his
statement of
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FINANCIAL ACCOUNTING
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