Assume the Position

1. Assume the Position

2. ACT 1100Introduction to Accounting Lecturer: Troy J. Wishart Summer Course

3. Our Confession ACT 1100 Is EASY POP! Because, Excellence is my Style!

4. Bank Reconciliation Lecture Notes 8

5. Bank Reconciliation Introduction • Monies deposited in and paid out of the business’s bank account are usually recorded in the Bank Column of the cash Book. • The bank also keeps such a record of items deposited and paid from the account, which should obviously match with the business’ record.

6. Bank Reconciliation Introduction • However, there might be items paid into and out of our account at the bank which we have not recorded in the cash book.

7. Bank Reconciliation Introduction

8. Bank Reconciliation Introduction • There may also be items that are recorded in the cash book, but not showing up on the bank account.

9. Bank Reconciliation Introduction • As such, a Bank Reconciliation Statement should be prepared in order determine why there is a difference.

10. Bank Reconciliation Definition • A calculation comparing the cash book with the bank balance. • Made up of two (2) words “Bank” & “Reconciliation”

11. Bank Reconciliation Definition • Bank – Closing balances on • Bank Column of the Cash Book • Bank Statement balance of the business’ bank account

12. Bank Reconciliation Definition • Reconciliation - is a process that comes from the root “To Reconcile”, which means: • To Make agree • To explain disagreement in order to make agree

13. Bank Reconciliation Definition • Reconciliation - is a process that comes from the root “To Reconcile”, which means: • To bring into agreement or harmony; • Make compatible or consistent: • To reconcile differing statements; • To reconcile accounts.

14. Bank Reconciliation Definition • It should show whether or not errors have been made either in the bank columns of the cash book or on the bank statement.

15. Bank Reconciliation Definition • It is not a statement of double entry but just one explaining the difference between the bank balance and the cash book bank column.

16. Bank Reconciliation Why do we need it? • The bank reconciliation statement is drawn up so as to cause the bank statement balance to agree with the cash book bank balance.

17. Bank Reconciliation Why do we need it? • To determine the items responsible for the difference and to correct the cash book bank balance, since the bank balance is needed for the balance sheet.

18. Bank Reconciliation Reasons for Differences • Reasons for difference between the two sources of information are broadly categorized as:

19. Bank Reconciliation Reasons for Differences • Specific factors responsible for cash book balance and balance as shown by the bank statement being different:- • Deposits in transit • Unpresentedcheques • Bank charges • Bank credits • Bank or depositor’s errors

20. Bank Reconciliation Deposits in Transit • Cash deposits made at the end of the monthinto the business’ bank in one month but received and recorded by the bank in the following month.

21. Bank Reconciliation Deposits in Transit • Deposits in transit at the end of one months would be included in the next month bank statement • Therefore it must be deducted from the deposits for the month as per bank statement • To ascertain those deposits received during the month for that month.

22. Bank Reconciliation UnpresentedCheques • These are cheques which have been paid and dispatchedto individuals or business, but which have not been presented for payment at the payer’s bank.

23. Bank Reconciliation UnpresentedCheques • In effect these are items that are entered on the credit side of the cash book and had not yet been entered in the bank’s records.

24. Bank Reconciliation UnpresentedCheques • Unpresentedcheques at the end of one month may be presented during the next month.

25. Bank Reconciliation UnpresentedCheques • Those presented outstanding cheques from the previous period must be deducted from the cheques received during the month to derive those cheques paid and encashed at the bank during the month under consideration.

26. Bank Reconciliation Bank Charges • These are charges which have been dispatched to the depositor’s balance for such items as: • Bank Services, • Printing Cheques, • Safe Deposit Rentals • and Not Sufficient Funds (NSF) Cheques. • The depositor may not be aware of these charges until the receipt of the bank statement.

27. Bank Reconciliation Bank Credits • Collection or deposits by the bank for the benefit of the account holder that may not be known to themuntil the bank statement is received.

28. Bank Reconciliation Bank or Depositors Errors • Errors on either the part of the bank or the part of the depositor causing the bank balance to disagree with the depositor’s book balance.

29. Bank Reconciliation Standing Order • A standing order is a request by a customer for the bank to make payments to third parties on a periodic basis.

30. Bank Reconciliation Standing Order • The customer records the transaction in his books on receipt of his bank statement, as he is unaware as to when or if the bank had made the payment on his behalf.

31. The Bank Reconciliation MODEL

32. Bank Reconciliation Model

33. Bank Reconciliation Model

34. Bank Reconciliation DishonouredCheques • When a cheque is received from a customer and paid into the bank, it is recorded: • Debit Side of the Cash Book Bank Column • Credit Side of the Bank Statement.

35. Bank Reconciliation DishonouredCheques • If at a later date the customers bank refuses to pay us the amount due on the cheque – This is known as a DishonouredCheque.

36. Bank Reconciliation DishonouredCheques • There are several reasons for this as shown in this example – • Let us suppose that K. King gave us a cheque for $5,000 on May 20, 2002. We bank it and a few days later the bank returns the cheque to us. • Figures and Words Don’t Match – “If King had put $5,000 in figures, but had written in words five thousand five hundred dollars on the cheque” • This cheque would not be honoured by the bank and would have to be returned to King for amendment.

37. Bank Reconciliation DishonouredCheques • There are several reasons for this as shown in this example – • Let us suppose that K. King gave us a cheque for $5,000 on May 20, 2002. We bank it and a few days later the bank returns the cheque to us. • Stale Dated Cheques– Cheques are considered stale dated after six (6) months after the date on the cheque. The bank will not pay cheques 6 months old. • “If King had put 2001 on the cheque instead of 2002 then the cheque would be returned by the bank.”

38. Bank Reconciliation DishonouredCheques • There are several reasons for this as shown in this example – • Let us suppose that K. King gave us a cheque for $5,000 on May 20, 2002. We bank it and a few days later the bank returns the cheque to us. • Not Sufficient Funds Cheques– “If King only had a balance of $2,000 in his account the bank will not honour the cheque of $5,000 because it will result in a overdraft on his account.” • The bank will write on the cheque “refer to drawer” and return in to us as a dishonouredcheque.

39. Bank Reconciliation DishonouredCheques Accounting Entries K. King May 1 Balance b/d 5,000 May 20 Bank 5,000 May 25 Bank: Dis Chq 5,000 Bank Account May 20 K King 5,000 May 25 Bank: Dis Chq 5,000

40. Bank Reconciliation Bank Overdraft • An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. • In this situation the account is said to be "overdrawn". • It is shown by a credit balance in the cash book or a debit balance on the bank statement. • The adjustment needed to reconcile the bank overdraft is the complete opposite of an account that is not overdrawn.

41. Bank Reconciliation Bank Overdraft – Comparison Balances Overdraft $ $ Balance/Overdraft as per cash book 0000 0000 Adjustments UnpresentedChequesPlus Less Bank lodgments LessPlus Balance/Overdraft per Bank Statement 0000 0000