Topic Eight

1. Topic Eight Bank Reconciliation Statement

2. Recap • Topic seven lessons • Importance of control accounts in identification and correction of errors • Control accounts can help identify errors that could otherwise not be identified by the trial balance • Control accounts helps improve internal control systems • Bank reconciliations are part of internal controls. • They help to check control over cash balances • We shall appreciate the importance of performing regular bank reconciliations

3. Learning outcomes After studying this topic,you should be in a position to: • Describe a bank reconciliation statement • Explain why we prepare bank reconciliations • Prepare bank reconciliations • Pass correction entries to clear reconciling differences

4. Why prepare bank reconciliations? • To ascertain accuracy of the cash book • To identify errors made by the bank in good time • To identify dishonored cheques and adjust customers accounts promptly • To identify omitted expenses. • To review stale cheques where payees have not banked for more than six months • Prevent errors and frauds

5. Preparing bank reconciliations Useful tips • Bank reconciliations should be performed regularly • Reconciling differences should be investigated • Errors in the cash book should be corrected promptly • Errors by the bank should be reported promptly • Bank reconciliations should be reviewed by a responsible company official

6. Reconciling differences • Common reconciling differences • Outstanding cheques:- Are cheques payments that are yet to be effected by the bank. Payees might have not banked the cheques. No adjustment is required in the cash book unless for cheques that have become stale • Deposits in transit: Relates to deposits made mainly towards year end. They are most likely to be recorded by the bank in the subsequent period. If proof of subsequent recording by the bank can be done, no adjustment is required in the cash book

7. Common reconciling differences • Errors in the cash book : Recording errors might be made by accountants for payments and receipts resulting to either over or under banking. Entries should be passed to make corrections for these errors. • Errors in the bank:- Bank officials could also make errors. When such are identified, a quick follow up should be done to ensure that they are corrected by the bank. No adjustments are required in the cash book. • Bank charges:- Banks will charge for the services offered. Accountants might fail to identify these charges except after performing bank reconciliations. Such expenses should be posted in the cash book.

8. Common reconciling differences • Direct deposits Some customers could be making direct payments into the company’s bank accounts. At year some of these receipts will not have been posted. The cash book should be adjusted for direct deposits. • Direct transfers Banks offer collection and payment system. Direct transfers arise where the company has contracted the bank to be making some regular payments directly to service providers such as for insurance. In such a case, the accountant might fail to post such payments and the cash book should be adjusted accordingly.

9. Bank reconciliation • To learn how to prepare bank reconciliations, we shall make use of an illustration. Illustration Rakesh superstores’ senior accountant noted that as at 31 July 2011, the cash book ledger did not tally with the bank statement. Whereas the cash book ledger had a balance of $10,483.25, the bank statement balance was $12,486.80. On further enquiries the following was noted.

10. Bank reconciliations • The bank made an error in recording a deposit made by Rakesh. Instead of recording the amount in the cheque of $6,600, they recorded $6,260. • As at 31 July 2011, the following cheques issued to various payees had not been paid by the bank. Cheque no Amount ($) 367 2,517.75 396 3,357.00 381 1,678.50 373 1,678.50 386 4,196.25 394 3,357.00 Total 16,785.00

11. Bank reconciliations • Some customers made direct deposits into the bank account which were yet to be recorded by Rakesh. The listing of these deposits are as follows; Ref Amount ($) Abdul (2,000.00) Yusuf (1,500.00) • The cashier had made an error on 18 July 2011. Instead of posting a cheque payment (Cheque no. 365) to Duncan Stores of $6,550, he posted the payment as $6,200.

12. Bank reconciliations • Bank charges amounting to $180 had not been posted as at the close of the month. • Direct transfers by the bank for monthly insurance premium of $400 had not been posted. However, the insurance expense for the month had been properly posted. • The bank did not credit a deposit of $871.45 made by Rakesh on 12 July 2011. The bank manager admitted that this was an oversight on the part of the bank and confirmed that the error had been corrected.

13. Bank Reconciliations • The bank had not recorded the following deposits made by Rakesh on 31 July 2011. Cheque No. Amount ($) 1214 7,600.00 138 8,540.00 Required:- • Reconcile the bank statement with the cash book • Pass entries to correct the cash book See next slide for suggested solutions

14. Bank Reconciliations

15. Bank Reconciliations

16. Bank Reconciliations

17. Bank reconciliations

18. Reconciliation of bank statement with an overdraft • Similar principles apply • Important notes are • Bank overdraft overstated by debits in cash book not recorded by the bank • Bank overdraft understated by credits in cashbook not in the bank • Debits in the bank not in the cash book will cause cash book OD to be understated • Credits in the bank not in the cash book will cause cash book OD to be overstated Reconciliation will be performed as illustrated above subject to the above four tips

19. Correction entries • Necessary to restate the cash book • As noted earlier, errors should be investigated and adjusted in the accounts promptly • Backlog of errors in the bank reconciliation dilutes controls over cash and bank We shall use our earlier illustration to demonstrate how to pass correction entries.

20. Correction entries • Errors identified in the cash book based on the reconciliations were; • Omission of direct deposits amounting to $3,500 • Misposting of payments by $350 ($6,550 - $6,200) • Omission of bank charges $180 • Omission of bank transfers for insurance premiums $400 See the next slide for correction entries

21. Correction entries

22. Conclusion/Summary • In this topic we have learnt; • the importance of preparing bank reconciliations • How to prepare bank reconciliations • Have identified major sources of reconciling differences such as; • Outstanding cheques • Deposits in transit • Errors in the cash book • Errors in the bank • Bank charges omitted in the cash book • Direct deposits unrecognized in the cash book • Direct transfers in the bank not recognized in the cash book • We have identified correction entries necessary to update the cash book with some reconciling items

23. Conclusion/Summary • Questions