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CHAPTER 11
Bank Reconciliation
    Statement
LEARNING OBJECTIVES
• Distinguish and explain items appearing
  in the Bank Statement and Bank account
• Explain the need and the purpose of
  preparing the Bank Reconciliation
  Statement
• Prepare the Bank Reconciliation
  Statement
INTRODUCTION
   Every month, individuals and businesses maintaining a #Current
    Account” with a bank will receive a Bank Statement from the bank.
   Upon receiving the bank statement, the focus is normally on the
    ending balance besides the transactions on whatever deposits and
    payments made.
   The business expects the ending balance appearing in the bank
    statement is the same as the amount in the Cash Book (bank
    column)..
   Thus, the purpose of Bank Reconciliation is to do necessary
    adjustments to our records in the cash book and come up with the
    same ending balance as recorded by the bank.
   It is an analysis explaining the difference between a business’s
    book balance of cash and its bank statement balance.
   The Bank Reconciliation Statement must be prepared monthly to
    justify amounts reported in the Bank Statement and the Bank
    account kept by the business.
BANK STATEMENT
   Bank Statement is normally debited for payments
    or charges, and credited for receipts by the
    business.
i. Examples of payments and charges: cheques
    drawn in favour of creditors or suppliers, bank
    charges, direct debits and standing
    order/instructions.
ii. Examples of receipts: deposits of cash or
    cheques, dividend, interest on current account
    and bank GIRO credits or credit transfer.
Sample Bank Statement
                                         UITM BANK
                                          Shah Alam
                                    Statement of Account
Account No. 654321                                                     Date: 30April
2007

  Date                Particulars            Debit          Credit        Balance
April 1    Balance b/f                                                        800.50 Cr
April 3    Cash deposit                                     7,000.00        7,800.50 Cr
April 4    Transfer from branch                             2,500.00       10,300.50 Cr
April 6    Cheque book                               5.00                  10,295.50 Cr
April 8    70010                                 550.00                     9,745.50 Cr
April 10   70011                                 700.00                      9,045.50Cr
April 12   70012                                 430.00                     8,615.50 Cr
April 15   Bank GIRO Credit                                   645.00        9,260.50 Cr
April 20   Direct Debit                          574.00                     8,686.50 Cr
April 25   Interest                                           166.70        8,853.20 Cr
April 28   Bank Charges                           10.00                     8,843.20 Cr
CASK BOOK (BANK COLUMN)

   Cash book or bank account is normally
    debited with receipts (deposits of cash or
    cheques)
   credited with payments (cheques drawn in
    favour of creditors or suppliers) of the
    business.
Sample Bank account
                     Bank account

Balance bId         800.50    Bank charges -cheque     5.00
                              book
Cash deposit       7,000.00   AB Trading – 70010      550.00
Credit Transfer   2,500.00    Maju Bhd - 700011      700.00
Intan Brothers      200.00     Arif -70012           430.00
                              Sam-70013              350.00
                  ________    Balance c/d          8,465.50
                  10,500.50                      10,500.50
Differences between Bank Statement
Balance and Bank Account Balance.
a) Items recorded in the Bank account but not recorded by the
    bank:
i. Uncredited lodgement or deposits not yet credited. This
    happens when a business deposits money or cheques but
    the amount does not appear in the bank statement since the
    deposits has not yet been processed by the bank; but has
    already been recorded by the business.
Ii. Unpresented cheques. Cheques drawn for payment to
    creditors or others have not been cashed or banked, i.e.,
    when cheques are drawn for payment and sent to creditors,
    the record in the business books has been made, but for
    some reasons the creditor is still carrying the cheque around
    and have not presented it to the bank for clearance.
Differences between Bank Statement
Balance and Bank Account Balance.
(b) Items recorded in the Bank Statement but not recorded by the business:
i. Direct debit. The bank debited the account of the business for payments
     such as insurance premiums, rates, fees, subscriptions etc.
ii. Standing instructions order. This is quite similar to the direct debit in that
     the bank will debit the account of the business for payments such as
     insurance premiums, rates, subscriptions, etc.
iii. Bank service charge. This is a fee charged by the bank for operating the
     account for the business andlor issuing the cheque book.
iv. Bank GIRO credit or credit transfer. The business account is credited with
     amount paid by creditor or other organisation direct into the business bank
     account.
v. Interest revenue on current account This interest is credited to the
     account of the business and is paid by certain bank based on large enough
     balance of cash in the account.
vi. Dishonoured cheques. A cheque, that the bank will not honour upon
     presentation by the business for clearance. However, the business has
     already accepted the cheque for the cash book settlement of a debt.
Differences between Bank Statement
Balance and Bank Account Balance.
(c). Errors
I.   Errors made by the bank - a cheque payment
     by a debtor had been debited to the business
     account by the bank, or a bank may make an
     error in recording the amount to be debited or
     credited.
II.  Errors made by the business - error in
     recording the amount to be debited or credited,
     or transactions are being debited to the cash
     book instead of being credited.
PREPARATION OF ADJUSTED
BANK/CASH BOOK ACCOUNT
      Updating the Bank account
i.     Matching of entries on the bank statement with those in the bank
       account. This is done by ticking items that appear both in the bank
       statement and in the bank account.
ii.    Items appearing in the bank statement but not in the bank account
       are transferred to the bank account.
iii.   There would still be items in the bank account left unticked and
       they would be treated as either uncredited lodgement (if it is a debit
       item) or as unpresented cheques (if it is a credit item) and these
       items would be dealt with in the bank reconciliation statement later
       on.
iv.    Any errors relating to the bank account would be dealt with at this
       stage.
v.     Complete the necessary double entry and carry down the balance
       of the bank account.
PREPARATION OF BANK
RECONCILIATION STATEMENT
b. Preparing the Bank Reconciliation Statement

i. Start with balance as per updated bank account balance
     Bank Reconciliation Statement as at …..
     Balance as per updated bank account                    xx
     Add: Unpresented cheques                               xx
     Less: Uncredited lodgements                          (xx)
     Balance as per bank statement                        xxx
ii. Start with balance as per bank statement
     Bank Reconciliation Statement as at….
     Balance as per bank statement                           xx
     Add: Uncredited lodgements                              xx
     Less: Unpresented cheques                             (xx)
     Balance as per updated bank account                   xxx
TREATMENT OF ERRORS, OVERDRAFT AND
OPENING BALANCE
DISAGREEMENTS
   The explanation below are meant for bank reconciliation
    statement that starts with the updated bank account balance:
I. Opening balance disagreements: the normal procedure is to
    account for the opening difference, i.e. by matching and
    ticking against the entries in the previous period’s bank
    account.
II. Errors made by the bank: if as a result of the error, the bank
    balance has been understated, for example, if the bank had
    wrongly debited the bank statement, subtract the amount, The
    reverse treatment is necessary if the bank had wrongly
    credited the bank statement and as a result the bank
    statement balance had been overstated.
III.Overdraft for such cases the uncredited lodgement will be
    added whilst the unpresented cheques subtracted.
Example
                   Bank account
Balance b/d      8465.50 Direct debit            574.00
Bank GIRO Credit  645.00 Bank charges             10.00
Interest          166.70 Balance c/d           8,693.20
                 9,277.20                      9,277.20

  Bank Reconciliation Statement as at 30 April 2007
Balance as per bank account (updated)           8,693.20
Add: Unpresented cheques                          350.00
                                                9,043.20
Less: Uncredited lodgments                       200.00
Balance as per bank statement                   8,843.20

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Ch 10 bank reconciliation

  • 2. LEARNING OBJECTIVES • Distinguish and explain items appearing in the Bank Statement and Bank account • Explain the need and the purpose of preparing the Bank Reconciliation Statement • Prepare the Bank Reconciliation Statement
  • 3. INTRODUCTION  Every month, individuals and businesses maintaining a #Current Account” with a bank will receive a Bank Statement from the bank.  Upon receiving the bank statement, the focus is normally on the ending balance besides the transactions on whatever deposits and payments made.  The business expects the ending balance appearing in the bank statement is the same as the amount in the Cash Book (bank column)..  Thus, the purpose of Bank Reconciliation is to do necessary adjustments to our records in the cash book and come up with the same ending balance as recorded by the bank.  It is an analysis explaining the difference between a business’s book balance of cash and its bank statement balance.  The Bank Reconciliation Statement must be prepared monthly to justify amounts reported in the Bank Statement and the Bank account kept by the business.
  • 4. BANK STATEMENT  Bank Statement is normally debited for payments or charges, and credited for receipts by the business. i. Examples of payments and charges: cheques drawn in favour of creditors or suppliers, bank charges, direct debits and standing order/instructions. ii. Examples of receipts: deposits of cash or cheques, dividend, interest on current account and bank GIRO credits or credit transfer.
  • 5. Sample Bank Statement UITM BANK Shah Alam Statement of Account Account No. 654321 Date: 30April 2007 Date Particulars Debit Credit Balance April 1 Balance b/f 800.50 Cr April 3 Cash deposit 7,000.00 7,800.50 Cr April 4 Transfer from branch 2,500.00 10,300.50 Cr April 6 Cheque book 5.00 10,295.50 Cr April 8 70010 550.00 9,745.50 Cr April 10 70011 700.00 9,045.50Cr April 12 70012 430.00 8,615.50 Cr April 15 Bank GIRO Credit 645.00 9,260.50 Cr April 20 Direct Debit 574.00 8,686.50 Cr April 25 Interest 166.70 8,853.20 Cr April 28 Bank Charges 10.00 8,843.20 Cr
  • 6. CASK BOOK (BANK COLUMN)  Cash book or bank account is normally debited with receipts (deposits of cash or cheques)  credited with payments (cheques drawn in favour of creditors or suppliers) of the business.
  • 7. Sample Bank account Bank account Balance bId 800.50 Bank charges -cheque 5.00 book Cash deposit 7,000.00 AB Trading – 70010 550.00 Credit Transfer 2,500.00 Maju Bhd - 700011 700.00 Intan Brothers 200.00 Arif -70012 430.00 Sam-70013 350.00 ________ Balance c/d 8,465.50 10,500.50 10,500.50
  • 8. Differences between Bank Statement Balance and Bank Account Balance. a) Items recorded in the Bank account but not recorded by the bank: i. Uncredited lodgement or deposits not yet credited. This happens when a business deposits money or cheques but the amount does not appear in the bank statement since the deposits has not yet been processed by the bank; but has already been recorded by the business. Ii. Unpresented cheques. Cheques drawn for payment to creditors or others have not been cashed or banked, i.e., when cheques are drawn for payment and sent to creditors, the record in the business books has been made, but for some reasons the creditor is still carrying the cheque around and have not presented it to the bank for clearance.
  • 9. Differences between Bank Statement Balance and Bank Account Balance. (b) Items recorded in the Bank Statement but not recorded by the business: i. Direct debit. The bank debited the account of the business for payments such as insurance premiums, rates, fees, subscriptions etc. ii. Standing instructions order. This is quite similar to the direct debit in that the bank will debit the account of the business for payments such as insurance premiums, rates, subscriptions, etc. iii. Bank service charge. This is a fee charged by the bank for operating the account for the business andlor issuing the cheque book. iv. Bank GIRO credit or credit transfer. The business account is credited with amount paid by creditor or other organisation direct into the business bank account. v. Interest revenue on current account This interest is credited to the account of the business and is paid by certain bank based on large enough balance of cash in the account. vi. Dishonoured cheques. A cheque, that the bank will not honour upon presentation by the business for clearance. However, the business has already accepted the cheque for the cash book settlement of a debt.
  • 10. Differences between Bank Statement Balance and Bank Account Balance. (c). Errors I. Errors made by the bank - a cheque payment by a debtor had been debited to the business account by the bank, or a bank may make an error in recording the amount to be debited or credited. II. Errors made by the business - error in recording the amount to be debited or credited, or transactions are being debited to the cash book instead of being credited.
  • 11. PREPARATION OF ADJUSTED BANK/CASH BOOK ACCOUNT  Updating the Bank account i. Matching of entries on the bank statement with those in the bank account. This is done by ticking items that appear both in the bank statement and in the bank account. ii. Items appearing in the bank statement but not in the bank account are transferred to the bank account. iii. There would still be items in the bank account left unticked and they would be treated as either uncredited lodgement (if it is a debit item) or as unpresented cheques (if it is a credit item) and these items would be dealt with in the bank reconciliation statement later on. iv. Any errors relating to the bank account would be dealt with at this stage. v. Complete the necessary double entry and carry down the balance of the bank account.
  • 12. PREPARATION OF BANK RECONCILIATION STATEMENT b. Preparing the Bank Reconciliation Statement i. Start with balance as per updated bank account balance Bank Reconciliation Statement as at ….. Balance as per updated bank account xx Add: Unpresented cheques xx Less: Uncredited lodgements (xx) Balance as per bank statement xxx ii. Start with balance as per bank statement Bank Reconciliation Statement as at…. Balance as per bank statement xx Add: Uncredited lodgements xx Less: Unpresented cheques (xx) Balance as per updated bank account xxx
  • 13. TREATMENT OF ERRORS, OVERDRAFT AND OPENING BALANCE DISAGREEMENTS  The explanation below are meant for bank reconciliation statement that starts with the updated bank account balance: I. Opening balance disagreements: the normal procedure is to account for the opening difference, i.e. by matching and ticking against the entries in the previous period’s bank account. II. Errors made by the bank: if as a result of the error, the bank balance has been understated, for example, if the bank had wrongly debited the bank statement, subtract the amount, The reverse treatment is necessary if the bank had wrongly credited the bank statement and as a result the bank statement balance had been overstated. III.Overdraft for such cases the uncredited lodgement will be added whilst the unpresented cheques subtracted.
  • 14. Example Bank account Balance b/d 8465.50 Direct debit 574.00 Bank GIRO Credit 645.00 Bank charges 10.00 Interest 166.70 Balance c/d 8,693.20 9,277.20 9,277.20 Bank Reconciliation Statement as at 30 April 2007 Balance as per bank account (updated) 8,693.20 Add: Unpresented cheques 350.00 9,043.20 Less: Uncredited lodgments 200.00 Balance as per bank statement 8,843.20