BANK RECONCILIATION STATEMENT

SOURCES FROM WHICH THE BUSINESS CAN OBTAIN ITS BANK BALANCE:
1. Cash book (Bank Column) – The business’ record of money received and
paid into the bank
2. Bank Statement – the bank’s record of money received and paid into the
bank on behalf of the business. It is prepared at the end of each month
by the bank.
In theory, the balance on each should be the same but in practice, they are not
for any of the following reasons:
1. Bank Charges – fees which the bank charges the business for its services.
These fees are simply deducted by the bank directly from the business’
account, thus decreasing it.
2. Interest Received – interest which the business would have earned on its
account is paid directly into the business’ bank account, thus increasing
it.
3. Dividend Received – dividend received from other companies in which
the business would have invested. This amount would be paid into the
business’ bank account by these companies, thus increasing it.
4. Credit Transfer/Bank Giro/Bank Transfer – money is paid directly
through the banking system into the bank account of the business, thus
increasing it.
5. Standing Order – the business gives permission to the bank to deduct a
specific amount of money from its account on a specific date and pay to
a specific person/firm. This reduces the bank account balance.
6. Direct Debit/Debit Transfer – the bank deducts an amount from the
business’ bank account and pay to a creditor of the business. This
reduces the bank account balance.
7. Unpresented cheques – These are cheques paid to creditors of the
business but they have not yet cashed the cheque or presented it for
payment during the same month in which it was paid. This reduces the
cash book balance.
8. Late lodgements- These are cheques received from debtors of the
business, recorded in the cash book as receipts but they have not been
deposited on time for them to appear on the bank statement. This
increases the cash book balance.
 9. Dishonoured cheques – These are cheques received from debtors and
recorded in the cash book but were later dishonoured by the bank for
any of the following reasons:
a. The cheque was stale-dated
b. The amount in words does not match the amount in figures
c. The signature on the cheque does not match the specimen
signature at the bank
d. The debtor does not have enough money in his account to cover
the amount on the cheque

EFFECT OF EACH ITEM ON THE CASH BOOK BALANCE AND THE BANK
STATEMENT BALANCE
ITEM EFFECT ON CASH EFFECT ON
BOOK BALANCE BANK
STATEMENT
BALANCE
1. BANK CHARGES No effect Decrease
2. INTEREST RECEIVED No effect Increase
3. DIVIDEND RECEIVED No effect Increase
4. CREDIT TRANSFER/BANK No effect Increase
TRANSFER
5. STANDING ORDER No effect Decrease
6. DIRECT DEBIT/DEBIT TRANSFER No effect Decrease
7. UNPRESENTED CHEQUES Decrease No effect
8. LATE/OUTSTANDING Increase No effect
LODGEMENTS
9. DISHONOURED CHEQUE* Originally No effect
Increased

STEPS INVOLVED IN BANK RECONCILIATION

1. Collect the bank statement at the end of the month. Now, you will have
both sources.
2. Compare the debit side of the cash book with the credit (deposit)
column of the bank statement and vice versa.
3. Tick off the transactions which are similar on both sources. These are not
the items which cause the balances on both sources to differ.
 4. Identify the unchecked items in the cash book as well as those on the
bank statement. These are the items that cause the difference between
the balances
5. Prepare an Updated Cash Book (Bank column) starting with then ending
balance and update it with items that were omitted from the previous
cash book but were on the bank statement (bank charges,
interest/dividend received, credit transfer, standing order, direct debit).
Any cheque which has been dishonored by the bank is also recorded in
the updated cash book to cancel the previous receipt. The adjusted cash
book balance will represent the true or correct bank balance.
6. Prepare a Bank Reconciliation Statement to record items that were in
the cash book but not on the bank statement (unpresented cheques
and late lodgements).

THE BALANCES SHOULD NOW AGREE!

THE UPDATED CASH BOOK

Since there were items which were on the bank statement that were omitted
from the original cash book for that month, (Items 1 to 6 above), they will be
used to prepare a new cash book called the UPDATED CASH BOOK (BANK
COLUMN ONLY). Items 1-6 above will be recorded in this updated cash book to
derive the adjusted ending balance. The dishonored cheque (item 9 above)will
also be cancelled from the original cash book with a credit entry in the updated
cash book since it was a cheque received by the business, recorded in the
original cash book but was later dishonored by the bank.
The Updated Cash Book should look like this:
NAME
UPDATED CASH BOOK (BANK COLUMN ONLY)
JUL 31 Balance b/d from original $ JUL 31 Standing Order XX
Cash book at month end XX JUL 31 Direct Debit XX
JUL 31 Credit Transfer XX JUL 31 Bank charges XX
JUL 31 Interest received XX JUL 31 Dishonored cheques XX
JUL 31 Dividend received XX JUL 31 Adjusted Balance c/d XX
---- ----
 XX XX
=== ===
AUG 1 Adjusted Balance b/d XX

Notice that the items used to update the cash book were recorded in such a
way that each has the same effect that it had on the bank statement balance.
Eg. Bank charges had decreased the bank statement balance so we also
decrease the updated cash book balance when we update by crediting it.
Likewise, the credit transfer had increased the cash book balance so we update
the cash book by debiting it to show an increase as well. Of course, the
dishonored cheque is credited to cancel a previous debit entry (a receipt of a
“bounced” cheque from a customer).

THE BANK RECONCILIATION STATEMENT

This is used to treat items that were in the original cash book but were not
shown on the bank statement (Items 7 and 8 above) due to timing differences.
These items will simply be used to temporarily reconcile the two balances in
order to rule out any other reasons (such as fraud or errors) for the difference
between the two balances. It should look like this:

NAME
BANK RECONCILIATION STATEMENT AS ON JULY 31, 2009
$
Balance as per updated cash book XX
Add unpresented cheques XX

XX
Less late lodgements (XX)
Balance as per bank statement XX
===
At this point, your updated cash book balance should be reflecting the same balance as that
on the bank statement.

YOU COULD ALSO BE ASKED TO START WITH THE BALANCE AS PER BANK STATEMENT AND
ADJUST IT TO DERIVE THE UPDATED CASH BOOK BALANCE AS FOLLOWS:

NAME
BANK RECONCILIATION STATEMENT AS ON JULY 31, 2009
$
Balance as per bank statement XX
Add late lodgements XX
XX
Less unpresented cheques (XX)

Balance as per updated cash book XX

===
As you can see, the reverse is done!