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Session No. 16

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Bank Reconciliation

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Background

In theory, the entries appearing on a business's bank statement should be

exactly the same as those in the business cash book. The balance shown by
the bank statement should be the same as the cash book balance on the
same date.

In practical life that hardly happens.

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Reasons for differences
Why might your own estimate of your bank balance be different from the amount
shown on your bank statement? There are three common explanations.
(a) Error. Errors in calculation, or recording income and payments.
(b) Bank charges or bank interest. The bank might deduct charges for interest on an
overdraft or for its services, which you are not informed about until you receive the
bank statement.
(c) Timing differences
• There might be some cheques that you have received and paid into the bank, but
which have not yet been 'cleared' and added to your account. (uncredited/
unlodged cheques)
• Similarly, you might have made some payments by cheque, and reduced the
balance in your account in the record that you keep, but the person who receives
the cheque might not bank it for a while. Even when it is banked, it takes a day or
two for the banks to process it and for the money to be deducted from your
account. (unpresented cheques)

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Bank reconciliation
A bank reconciliation is a comparison of a bank statement (sent monthly,
weekly or even daily by the bank) with the cash book. Differences between
the balance on the bank statement and the balance in the cash book will be
errors or timing differences, and they should be identified and satisfactorily
explained.

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Steps involved in the reconciliation process

1. Prepare a corrected cash book

2. Prepare a bank reconciliation statement

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Corrections is the cashbook

1. Payments made into the bank account or from the bank account by way
of standing order, which have not yet been entered in the cash book.

2. Interest or Dividends received (on investments held by the business),

paid direct into the bank account but not yet entered in the cash book.

3. Bank interest and bank charges, not yet entered in the cash book.

4. Errors in the cash book that need to be corrected.

Note:
Where there is a correction in a cashbook balance, the new balance is shown
in the SOFP. However, the same is not done at this stage. Double entries must
be passed as normal. For now, we are simply reconciling the figures.

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Corrections in the bank statement
Note that the bank statement is not the business’s document but that of the
bank. Therefore errors in it must be reconciled to the corrected cashbook
balance by preparing a bank reconciliation statement:

1. Cheques drawn (ie paid) by the business and credited in the cash book,
which have not yet been presented to the bank, or 'cleared', and so do
not yet appear on the bank statement. These are commonly known as
unpresented cheques or outstanding cheques.

2. Cheques received by the business, paid into the bank and debited in the
cash book, but which have not yet been cleared and entered in the
account by the bank, and so do not yet appear on the bank statement.
These are commonly known as outstanding lodgements or uncredited
cheques.

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Format to attempt questions

Adjusted cashbook Rs
Balance as per cash/bank book X
Add: Add direct deposits (Interest/ Dividend) X
Less: Bank interest/ charges (X)
Less: Standing order payments (X)
Add/less: Other errors X/(X)
Balance as per corrected cash/bank book X

Bank reconciliation statement Rs

Balance as per bank statement X
Add: Uncredited cheques/ lodgements X
Less: Unpresented cheques (X)
Add/less: Other errors X/(X)
Balance as per corrected cash/bank book X

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Format to attempt questions

• Note that signs in our workings would change depending on the flow
of info – Math

• Overdrafts will be denoted by a negative balance – Math

• You would debit a receipt and credit a payment, the bank will do the
reverse.

• Deposit account vs Current Account

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Examples / Questions

• Pg 258 (281) ACCA

• Pg 259 (282) ACCA

• Pg 260 (283) ACCA

• Pg 262 (285) ACCA

• Pg 360 (387) FW Q 30.3 – 30.5, 30.7, 30.8A

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Chapters to read:
• Chp 15 ACCA
• Chp 30 FW

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016

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Thank you

Institute of Business Administration (IBA) – Karachi FAIS MBA E FALL 2016