Bank reconciliation

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 6^th Jan, 2007 Master Denis received his monthly bank statement for the month ended 31^st 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 31^st 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 

financial position (balance sheet) at 30 November 2008. (3 marks)

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