SECTION 3: VERIFICATION OF ACCOUNTING RECORDS

CHAPTER 8:
BANK RECONCILIATION
TEACHER ENG
 USE AND PURPOSE OF A BANK STATEMENT
• The bank sends its customers a bank statement at regular intervals.
• A bank statement is a copy of the customer’s account as shown in the books of
the bank.
 BANK RECONCILIATION
Bank reconciliation is a process that explains the difference between the bank balance
as shown in the bank statement, supplied by the business’ bank on a particular date,
and the corresponding amount shown in the business’ cash book. It takes the form of
a working document known as a bank reconciliation statement.
Transactions recorded by the bank but not by the business:
» Bank charges and bank interest – a bank charge is a fee the bank has charged, for
example, fees for maintaining the account, overdraft processing fees and fees for
cashing overseas cheques. The bank can also charge interest on loans and overdrafts.
» Standing orders – the business can order its bank to pay a set amount of money
regularly on a stated date to an individual or an organisation. For example, a firm
might instruct its bank to pay an annual insurance premium, or a monthly loan
repayment.
» Direct debits – this represents an arrangement by a business with its bank for a
creditor to transfer money from the business’ account on pre-arranged dates.
Businesses usually pay utilities bills this way. Direct debits are different from standing
orders because the amount of a direct debit may vary from one month to the next,
whereas a standing order involves a fixed amount of money.
 BANK RECONCILIATION
» Dishonoured cheques – cheques that the business has received from another
person or company but which have been rejected for payment when the
business deposited it. This may be because there are insufficient funds in the
account of the drawer. However, there can be other reasons. For example, the
cheque may have been written out incorrectly, the signature may be suspect,
the word and figures may differ or the cheque may be out of date (usually,
more than six months old).
» Electronic direct payment (bank transfers) – it is now possible to transfer
money from one bank account to another electronically via the internet,
referred to as bank transfers. These are automatically recorded by the bank but
may not be recorded by the business.
 BANK RECONCILIATION
Transactions recorded by the business but not by the bank
• An uncredited cheque is one that has been received by the business from its
trade receivables, paid into the bank and debited in the cash book. However,
the cheque has not yet been cleared by the bank and entered in its records.
These cheques will therefore not appear in the bank statement. Such
cheques are known as ‘uncredited deposits’.
• Unpresented cheques are those issued by the business but not presented by
the payee to the bank. Sometimes cheques received by the bank are not
recorded by the bank due to a delay in the clearing of the cheque.
 TEST YOURSELF 8.1
1 State why bank reconciliation should be carried out.
2 Explain why money paid into the bank appears on the debit of the bank
account but on the credit of the bank statement
 BANK RECONCILIATION
Errors
The final reason the balance on the bank account may not be the same as the
balance in the bank column of the cash book is as a result of errors. These may
be errors by:
» the business – these errors should be corrected as soon as they are discovered
» by the bank – the bank should be notified of these errors as soon as possible.
 UPDATING THE CASH BOOK
WORKED EXAMPLE 1
The following cash book for July 2018.

Cash Book (bank columns only)

2018 $ 2018 $
1 Jul Balanced b/d 26 9 Jul Olivia 217
8 Jul Markus 350 19 Jul Noah 370
26 Jul Mikhail 323 31 Jul Balanced c/d 112
699 699
1 Aug Balanced b/d 112
 UPDATING THE CASH BOOK
The following items appeared on the bank statement for July 2018, but do not appear yet in
the cash book.

$
Interest paid 21
Standing order: Mehmet 45
Direct debit: Eastern Water 110
Dividends received 34

Bring the cash book up to date with the above items.

 UPDATING THE CASH BOOK

Cash Book (bank columns only)

2018 $ 2018 $
 BANK RECONCILIATION STATEMENT
WORKED EXAMPLE 2
The following are the cash book and the bank statement of Nadia.

Cash Book (bank columns only)

2018 $ 2018 $
1 Aug Balanced b/d 87 8 Aug Jian 171
8 Aug Elias 65 21 Aug Batkhaan 34
14 Aug Hunter 423 28 Aug Rebekah 124
27 Aug Shu 431 31 Aug Balanced c/d 677
1006 1006
1 Aug Balanced b/d 677
 BANK RECONCILIATION STATEMENT
Dr Cr Balance
$ $ $
1 Aug Balanced b/d 87
11 Aug Elias 65 152
12 Aug Jian 171 19 O/D*
18 Aug Hunter 423 404
24 Aug Batkhaan 34 370
31 Aug Balance c/d 370

*O/D means overdrawn balance. An overdrawn balance can also be shown as DR-indicating a
debit balance on the account from the viewpoint of the bank.
Prepare a bank reconciliation statement as at 31 August.
BANK RECONCILIATION STATEMENT
NADIA
Bank Reconciliation Statement as at 31 August.
$
 UPDATING THE CASH BOOK
WORKED EXAMPLE 3
Ella received a bank statement for May 2018 showing a credit balance of $134 at the end of the month.
The bank column of her cash book had a debit balance of $114 on 1 June. A comparison of the cash book
and the bank statement revealed the following.
1 Items appearing only on the bank statement:
Direct debit to Kalim $91
Cheque received from Julia, a credit customer, for $214 was dishonoured
Electricity bill paid by standing order $65
Dividends received $50

2 Items appearing only in the cash book:

Cheque paid to Loukas, a credit supplier $335
Cash sales paid directly into the bank on 24 May $95

3 The total of the credit side of the cash book had been overcast $100

Update the cash book of Ella as at 1 June 2018.

Once updated, prepare a bank reconciliation statement for the same date.
 UPDATING THE CASH BOOK

Ella
Cash Book as at 31 June 2018
2018 $ 2018 $

1006 1006
UPDATING THE CASH BOOK

ELLA
Bank Reconciliation Statement as at 31 June 2018
$
 TREATMENT OF ERRORS COMMITTED IN CASH
BOOKS OR BANK STATEMENTS
Errors should be corrected when preparing the bank reconciliation statement.
» Errors made by the bank – amounts debited in error by the bank are deducted
from the balance as per cash book and those credited in error added to the
balance as per cash book.
» Errors made by the business in the cash book – if the error has resulted in
the credit total being understated, then the amount should be entered on
the credit side of the updated cash book to correct the error. If the error has
resulted in the debit total being understated, then the amount should be
entered on the debit side of the updated cash book to correct the error.
 EXAM-STYLE QUESTIONS
1 Which statement is correct about a bank reconciliation statement?
A It contains bank charges and standing orders.
B It is part of the double entry book-keeping records.
C It is prepared by the bank.
D It is prepared by the trader.

2 A bank reconciliation statement was prepared starting with the balance at

bank shown on the bank statement. Which item would be deducted?
A bank error resulting in the account being incorrectly debited
B cash book error resulting in the balance being overstated
C cheque not yet credited
D cheque not yet presented
 EXAM-STYLE QUESTIONS
3 The bank column of a trader’s cash book showed a debit balance of $952.
This did not agree with the balance on the bank statement on the same date.
The following differences were found:
$
Cheque not yet presented 134
Bank charges 11
Rent paid by credit transfer 310

What was the balance on the bank statement?

A $765 credit B $765 debit C $1 139 credit D $1 139 debit
 EXAM-STYLE QUESTIONS
4 Zafar is a trader. He maintains a three column cash book and compares this
with his bank statement at the end of every month and prepares a bank
reconciliation statement.
a Suggest two reasons why it is useful for Zafar to reconcile his cash book with
the bank statement every month.
b Explain the difference between a cheque not credited and a cheque not
presented.
c Complete the following table by placing a tick in the correct column to
indicate whether each item would be used to update the cash book or would
appear in the bank reconciliation statement.
EXAM-STYLE QUESTIONS
 EXAM-STYLE QUESTIONS
5 The cash book (bank columns) of Ella for the month of May 20–7 were as
follows:
EXAM-STYLE QUESTIONS
 EXAM-STYLE QUESTIONS
The following errors were discovered:
1 Ella had overcast the debit side of her cash book by $100.
2 The bank should have charged the motor insurance to Ella’s personal bank
account not the business bank account.
a Update Ella’s cash book. Bring down the updated balance on 1 June 20–7.
b Prepare a bank reconciliation statement for Ella at 31 May 20–7.
c Prepare a relevant extract from Ella’s statement of financial position at 31
May 20–7 showing the entry for the bank balance.
 EXAM-STYLE QUESTIONS
6 Yatish is a trader. He compared his cash book with his bank statement on 30
June. The cash book showed an overdrawn balance of $2 356.
The following differences between the cash book and the bank statement were
discovered:
1 Cheques not yet presented for payment
$
Hemisha 428
Ben 910
 EXAM-STYLE QUESTIONS
2 Cash sales, $950, were not recorded on the bank statement.
3 The bank had debited $50 to the business bank account which should have
been debited to Yatish’s personal bank account.
a Prepare a bank reconciliation statement to show the balance on the bank
statement.
b Explain the difference between a bank statement and a bank reconciliation
statement.
c Explain why the entries on a bank statement are on the opposite side to
where they appear in the cash book.