Bank Reconciliation Statement: Principles and Examples

1. Principles of Account Bank Reconciliation Statement By Nancy Keong

2. Content - The purpose of the bank reconciliation statement. - The definition of the bank reconciliation statement. - Reasons for difference between the cash book and the bank statement. - Nature of the cash book and the bank statement. - Drawing up a bank reconciliation statement. - Example - Exercise

3. Due to the timing difference,omissions and errors made by the bank or the firm itself,the balances of the bank statement and the bank account in the cash book rarely agree. Bank reconciliation statements can be used to explain the reasons for the differences and to identify errors and omissions in both documents,so that corrections can be made as soon as possible. • THE PURPOSE OF THE BANK RECONCILIATION STATEMENT Back to the content

4. THE DEFINITION OF THE BANK RECONCILIATION STATEMENT • The bank balances as shown in the cash book and the bank statement seldom agree.There are various reasons for this.A statement is used to reconcile the two balances. Back to the content

5. 3.REASONS FOR DIFFERENCES BETWEEN THE CASH BOOK AND THE BANK STATEMENT. • Uncredited items • They are deposits paid into the bank.These items occurred too close to the cut-off date of the bank statement and so do not appear on the statement.They will appear on the next statement.

6. Reasons • Unpresented cheques • They are cheques issued by the firm that have not yet been presented to its bank for payment. • Standing orders • They are standing instructions from the firm to the bank to make regular payments. Back

7. Reasons • Direct debits • They are payments made directly through the bank. • Bank charges • They are charges made by the bank to the company for banking services used. Back

8. Reasons • Dishonoured cheques • They are cheques deposited but subsequently returned by the bank due to the failure of the drawer to pay. • Credit transfers/direct credits • They are collections from customers directly through the bank. Back

9. Reasons • Interest allowed by the bank • They are interest received for deposits or fixed deposits. Back to the content

10. 4. NATURE OF THE CASH BOOK AND THE BANK STATEMENT. • The balance in the cash book is an asset to the company,therefore: Cash book (A credit represents a decrease) (A debit represents an increase) Next

11. The balance as per the bank statement is a liability to the bank,therefore: Bank statement Dr. Cr. Balance (represents decreases) (represents increases) (represents the amount owed to the clients) Back to the content

12. 5. DRAWING UP A BANK RECONCILIATION STATEMENT • To reconcile the bank statement with the corrected cash book Check the bank statement and the cash book to see the items which have been omitted. Prepare the bank reconciliation statement. Update the cash book with any omissions and errors made by the itself. 1st step 2nd step final step Back to the content

13. Example A company’s cash book and bank statement for December 1996 appear as follows: Cash Book(bank column) • $ • Dec 1 Balance b/d 2800 • 3 W.Lee 1000 • 10 T.Cheung 2000 • 30 S.Sin 1400 • 7200 • $ • Dec 8 K.Wong 1600 • 20 C.Kwok 700 • 29 M.Tang 100 • 31 Balance c/d 4800 • 7200

14. Bank Statement • Dr Cr Balance • $ $ $ • Dec 1 Balance 2800 • 3 Cheque deposit 1000 3800 • 8 Cheque 76343 1600 2200 • 10 Cheque deposit 2000 4200 • 11 Dishonoured cheque 2000 2200 • 11 Service charge 30 2170 • 12 Autopay—Rent 250 1920 • 20 Cheque 76344 700 1220 • 31 Bank interest 50 1270 • 31 Credit transfer ---Commission received 300 1570 • 31 Balance 1570 Back

15. Answer (1st step) Cash Book(bank column) • $ • Dec 1 Balance b/d 2800 • 3 W.Lee * 1000 • 10 T.Cheung * 2000 • 30 S.Sin 1400 • 7200 • $ • Dec 8 K.Wong * 1600 • 20 C.Kwok * 700 • 29 M.Tang 100 • 31 Balance c/d 4800 • 7200 Unpresented cheque Uncredited item Back “*” are those appear both in the cash book and the bank statement.

16. Bank Statement • Dr Cr Balance • $ $ $ • Dec 1 Balance 2800 • 3 Cheque deposit * 1000 3800 • 8 Cheque 76343 * 1600 2200 • 10 Cheque deposit * 2000 4200 • 11 Dishonoured cheque 2000 2200 • 11 Service charge 30 2170 • 12 Autopay—Rent 250 1920 • 20 Cheque 76344 * 700 1220 • 31 Bank interest 50 1270 • 31 Credit transfer ---Commission received 300 1570 • 31 Balance 1570 Bank charge Back Direct debit

17. (2nd step) The corrected cash book and the bank reconciliation as at 31 December 1996 would appear as follows: Cash Book(bank column) • $ • Dec 31 T.Cheung— • Dishonoured cheque 2000 • 31 Bank chrges 30 • 31 Rent 250 • 31 Balance c/d 2870 • 5150 • $ • Dec 31 Balance b/d 4800 • 31 Commission • Received 300 • 31 Bank interest 50 • 5150 Back

18. (final step) Bank Reconciliation Statement as at 31 December 1996 $ Corrected balance in hand as per cash book 2870 Add Unpresented cheque 100 2970 Less Bank deposit not yet entered on bank statement 1400 Balance in hand as per Bank Statement 1570 Back to the content

19. Exercise • The following are extracts from the cash book and the bank statement 2000,and you are required to: • Write the cash book up to date,and the new balance as on 31 December 2000,and • Draw up a bank reconciliation as on 31 December 2000.

20. Cash Book • $ • Dec 1 Balance b/d 1740 • 7 T Ma 88 • 22 J Li 73 • 31 K Woo 249 • 31 M Poon 178 • 2328 • $ • Dec 8 A Dai 349 • 15 R Sun 33 • 28 G So 115 • 31 Balance c/d 1831 • 2328 Back

21. Bank Statement • Dr Cr Balance • $ $ $ • Dec 1 Balance b/f 1740 • 7 Cheque 88 1828 • 11 A Dai 349 1479 • 20 R Sun 33 1446 • 22 Cheque 73 1519 • 31 Credit transfer:J Wong 54 1573 • 31 Bank charges 22 1551 GO Back

22. Answer Cash Book • $ • Dec 31 Balance b/d 1831 • 31 J.Wong 54 • 1885 • $ • Dec 31 Bank charges 22 • 31 Balance c/d 1863 • 1885 Back

23. Bank Reconciliation Statement as on 31 December 2000 $ Balance per cash book 1863 Add Unpresented cheque 115 1978 Less Bankings not yet on bank statement (249+178) 427 Balance per bank statement 1551 Back

24. The end Back to the content